Understanding How Much You Can Borrow
Lenders will usually allow you to borrow up to 80% of your equity with a cash-out refinance and between 80 to 90% of your equity with a HEL or HELOC.
So, using the same numbers from earlier, if your home is worth $250,000 and you have an outstanding mortgage balance of $150,000, then you could end up with around $62,500 if you took the maximum loan amount :
This is a basic example for illustration purposes. Your final amount may be less due to closing costs or any other expenses associated with each loan.
Should You Get A Home Equity Loan
Everyones situation is different, and a home equity loan wont be the right choice for everyone. But if you have unused equity in your house or apartment and you want to tap into it without going through the hassle of refinancing your mortgage, a home equity loan is worth a look. In particular, if you intend to use the proceeds to improve your home, the potential tax deductibility of the interest on home equity loans makes them an option to strongly consider.
Your Equity Amount Will Help You Pick The Best Option
The more youve paid toward your home mortgage, the more financial options you have as you accumulate equity. Home equity loans and refinances are two options to get cash out of your homeownership.
The two arent one and the same, though. While both rely on the equity youve built in your home, the similarities between these financial products stop there. From how theyre used and when to use them to what they cost, home equity loans and refinances are starkly different options, each with its own pros, cons, and best uses.
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Use Your Equity To Improve Your Home
If you want to learn more about the best home-renovation loans, contact our team today. We are proud to serve San Diego and the surrounding area, and we would love to help you upgrade and improve your home!
Whether you need a purchase loan, an investment loan, or a renovation loan, we are ready to increase your chances of mortgage approval!
Which Is Easiest To Qualify For
A cash-out refi will usually be a bit easier to qualify for than a HELOC or home equity loan. It is replacing your primary mortgage; lenders like that because it gives them “first position” as a creditor.
A cash-out refi will usually be a bit easier to qualify for.
Home equity loans and HELOCs are second mortgages. Aside from being an additional mortgage on top of your original home loan, it also means the new loan or line of credit is second in line when it comes to payback priority.
Whether you decide on a HELOC, a home equity loan or a cash-out refinance, shop around to get the best rate and terms. You don’t have to go to your current mortgage lender, though you may want to ask for a quote.
» MORE: See top cash-out refinance lenders
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When To Consider A Home Equity Line Of Credit
If you need extra money intermittently, a variable-rate home equity line of credit might be your best choice. Once the lender approves you for a maximum line amount, you can access the available funds as you need them. Use your Home Equity Line of Credit Visa Access Card anywhere Visa is accepted, write a check, visit a branch or ATM, or log in to Online or Mobile Banking and transfer money to your U.S. Bank savings or checking account. You may have ongoing access to funds for 10 years, called the draw period, following the date you open your line of credit. After the draw period you’ll have a repayment period of 20 years.
Monthly minimum payments are variable and based on the amount of the line balance and the variable interest rate. As you pay the money back, the funds are available again on your HELOC. This provides you with a renewable source of funding during the 10-year draw period. This is a good option if you anticipate the need to make periodic payments for tuition or remodeling.
Although a home equity line of credit provides ongoing access to available funds, which may be tempting for some people, there are some critical things to consider.
- You have to pledge your home as collateral
- If you dont make payments, your property can go through foreclosure
- Your credit score is on the line if you arent diligent with your payments
Advantages And Disadvantages Of Home Equity Loans
A home equity loan can be a good way to convert the equity youve built up in your home into cash, especially if you invest that cash in home renovations that increase the value of your home. Although not always, the interest rates for home equity loans are usually lower than other credit products, such as personal loans and credit cards.
Another benefit to home equity loans is that you can pay off the loan early and refinance the loan at a lower rate. A refinancing is merely taking out a new loan, presumably at a lower interest rate than the existing loan, and using the funds to pay off the higher-rate loan. By refinancing at a lower rate, you can save on the monthly payment and pay off the loan sooner. However, borrowers would need to go through the credit approval process again, and there may be fees for booking the new loan.
A disadvantage of home equity loans is that the home could be sold to satisfy the remaining debt if the loan is not paid off or goes into default or nonpayment. As a result, borrowers must be sure not to get overextended and borrow more than they can afford to pay back. If the loan goes into default, the bank may foreclose on or take back the home to satisfy the debt.
Also, if real estate values decrease, the market value of your house could decline, and you could end up owing more than your home is worth. Should you want to relocate, and the home decreases in value, you might end up losing money on the sale of the home or be unable to move.
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Should I Refinance My Mortgage
If interest rates have dropped since you signed your mortgage, you might think about;refinancingOpens a popup.. But before you take the leap, there are a few things to consider.
When you refinance your mortgage, you replace your existing mortgage with a new one on different terms. To find out if you qualify, your;lender calculates your loan-to-value ratio by dividing;the;balance owing on your mortgage and any other debts secured by your property into the current value of your property.;If your loan-to-value ratio is lower than 80%, you can refinance.;
The lender also looks at your monthly income and debt payments. You may need to provide a copy of your T4 slip, notice of assessment or a recent pay stub; your mortgage statement; a recent property tax bill; and recent asset statements for your investments, RRSPs and savings accounts.
Change Your Term Or Get A Different Mortgage
Sometimes your needs change and you may have to pay off your mortgage faster or switch your mortgage type. If you get a bonus at work and want to put it towards your mortgage,;consider refinancing into a term with more prepayment privileges, such as an open mortgage.;Or, if interest rates have dropped, and you plan to stay in your home for the long haul, you can refinance to a;fixed-rate mortgageOpens a popup.;to lock in the lower rates.
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What Is A Cash Out Refinance
When you get a cash out refinance, you get a new mortgage. You pay off your current mortgage and replace it with a new one for a higher amount, taking out the difference in cash as a lump sum at closing. You get all the money at one time with a cash out refinance and cannot get additional money in the future from the loan. Because a cash out refinance involves getting a new mortgage, you will need to complete a new application, document your current finances, and pay a new set of closing costs.
Cash out refinances can be good choices if you know how much money you;need. If you want to consolidate higher interest debts and loan payments you might choose a cash out refinance. If you;are planning to complete home renovations and improvements, and know how much they will cost, you might also choose a cash out refinance. You;may pay for college with cash out refinances too.
An advantage of cash out refinances is that you can also change the terms of your mortgage with them. For example, when interest rates are falling, you can use a cash out refinance to get money from your home equity and change your interest rate at the same time. You can switch from an adjustable rate to a fixed rate mortgage or change the number of years you have to pay back your mortgage with a cash out refinance too.
Pros of a cash out refinance:
Cons of a cash out refinance:
Get A Home Equity Loan
These secured loans let you borrow a lump sum against your home equity. The specific loan terms depend on all of the usual financial credentials — your , debt payment history and income — and lenders generally require at least 15% equity to qualify. Home equity loans typically feature a fixed interest rate, but repayment periods can vary .;
To secure the best terms, the Federal Trade Commission recommends negotiating with multiple lenders and allowing them to compete for your business. Negotiable items might include lower fees, mortgage point prices and the fixed interest rate.;
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What Is A Second Mortgage
A second mortgage is another loan taken against a property that is already mortgaged. Many people consider using their home equity to finance large financial needs, but mortgage industry jargon has confused the meaning of certain terms including second mortgage home equity loan and home equity line of credit . A second loan, or mortgage, against your house will either be a home equity loan, which is a lump-sum loan with a fixed term and rate, or a HELOC, which features variable rates and continuing access to funds.
Why Home Equity Loans Dont Make Sense Right Now
Mortgage interest rates are lower right now than rates on home equity loans or HELOCs.; So you might be able to pull equity out of your home andlower the interest rate on your regular monthly payments at the same time. Experts say thats a smart move since the amount youll save on interest is far lower with a new mortgage ;what youre getting when you refinance than with a home equity loan or .
If your current mortgage rate is three and a half percent, youre not going to go out and take out a home equity line for four and a half, when you can instead refinance your first mortgage, and knock that rate down to maybe two and half percent, says McBride.;
After dropping to under 3% at the end of 2020, mortgage rates are slowly climbing back up, but are still much lower than they were a year ago before the pandemic. In early March, the average 15-year fixed mortgage rate a good loan for many to use when refinancing ;was still below 3.5%. Compared to the 4% average rate this loan type saw in July 2019, that is still a very low rate.
Using McBrides example on rates, and the cash-out refinance breakdown from above, heres exactly how much youd save on interest by doing a cash-out refinance instead of taking out a home equity loan on top of your original mortgage:
| Principal |
|---|
| 2.5% | $40,044.12 |
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Tapping Into Your Home Equity With A Hel Or Heloc
Home equity loans and home equity lines of credit are both second mortgages that use the equity in your home as collateral. However, there are some key differences between them:
Loan terms
A home equity loan is a second mortgage with a separate term and repayment schedule from your existing mortgage. HELs typically offer repayment terms of 15 or 20 years. You can repay the balance early without penalty and, upon payoff, the loan is closed.
A home equity line of credit is a second mortgage with a separate term and repayment schedule from your existing first mortgage, but unlike HELs, HELOCs allow you to draw cash as needed rather than in one lump sum. These cash draws are available for the first 10 years of the loan, which is called the draw period. After that, there is a 20-year repayment period when the credit line is no longer available and the balance is repaid. However, you may repay any portion of the balance at any time without penalty and still access the credit line within the draw period.
Interest rates and closing costs
Home equity loan interest rates are determined at the time you obtain the loan and are fixed for the life of the loan. HEL rates are typically higher than 30-year fixed-rate mortgage rates, but loan closing costs for these loans are substantially lower due to fewer operational and processing costs and lower loan amounts.
Receiving and using funds
Home Equity Vs Refinance
What home equity is and how you earn it
The difference between home equity loans, home equity lines of credit, and cash-out refinances
How to determine which home equity option is right for you
You worked hard, saved up, and bought your dream home. You’re steadily paying your mortgage, and now you’re starting to think about new financial goalslike home renovations, debt consolidation, or even paying for a childs college tuition.
If its extra liquidity you need, then your home itself can be a great source of additional cash. It’s all about tapping into your equity. Let’s go over what equity is and how you can turn it into cash with a second mortgage or a cash-out refinance.
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Personal Loans Come With Faster Closings
A personal loan already comes with one obvious pro. You dont have to put your home on the line. And one con. Youll likely pay a higher interest rate.
A second pro is that youll almost certainly get your money much sooner than with a refinance or home equity product. With those, it often takes 30-45 days to get your hands on the cash. With a personal loan, it rarely takes longer than a week and you can receive it in 24 hours.
But theres a third pro that often clinches it for borrowers: closing costs.
Refinancing: Heloc Vs Mortgage Loan Pros And Cons
Mortgage Development Manager at National Bank
With higher property values, one of the biggest perks of owning a home is the ability to tap into your homes equity for a variety of other financial needs.
Whether it is for debt repayment, the purchase of other assets, home renovations, a wedding, or some other large, unexpected expense, a Mortgage Loan or Home Equity Line of Credit can help you secure funds against the equity value of your home. Besides the immediate cash flow, you enjoy lower interest rates than what you may pay for most other types of personal loans.;
Both, HELOCs and Mortgage Loans unlock the equity value of your home. Understanding the ins and outs of both products will help you choose the one that best meets your financial requirements and goals.;
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Home Equity Loan Costs
Like other financial products, home equity loans often have fees that may not be obvious unless youre looking for them. According to the Federal Trade Commission , you could be asked to pay an application or loan processing fee, as well as an origination fee of up to 5% of your loan amount.
You will also likely need to pay for an appraisal to prove your home has enough value to support the loan, and you may also face document preparation fees, recording fees or broker fees as well. So its important to ask about fees up front and look for lenders who offer home equity loans with very limited extra fees and closing costs.
If youre considering a home equity loan, make sure to shop around and compare lenders, their rates and the fees they charge. One way to do that is through an online marketplace such as LendingTree, which offers the convenience of only having to submit your details once, and then getting offers from multiple lenders that you can compare and consider.
What Are The Risks And Costs Of Refinancing
Make sure you factor in fees before you decide if refinancing is right for you.;You need to pay;appraisal costsOpens a popup., legal fees and possible;prepayment charges.;If you switch lenders, you may have to pay a discharge fee.;Also, be aware that taking out home equity comes with risks. For example, if;you switch from;a fixed-rate mortgage to a variable-rate mortgage, you may deal with rising interest rates and higher monthly payments in the future.
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Heloc: Flexibility & Options
A HELOC, or home equity line of credit, also borrows against the equity you have in your home. Heres how it works: First, you are approved for a HELOC amount, which is like your credit limit on a credit card. You may withdraw some or all of your HELOC funds as you need them during your draw period .
Example: Lets imagine that you are approved for a $35,000 HELOC. You withdraw $5,000 from your HELOC to pay some urgent bills. Five months later, you withdraw $10,000 to pay for a bathroom remodel. At this point, you have used a total of $15,000 of your HELOC funds, leaving $20,000 still available.
So, if you take out money several times during your draw period, your monthly payment is based on the outstanding balance on your HELOC. HELOCs typically have variable rates, which means your interest rate will fluctuate up and down with the market.
Lenders such as Desert Financial offer a fixed-rate HELOC option which allows you to cement your interest rate when you withdraw funds. So, your $5,000 withdrawal at 3.50% will always have that interest rate. However, as you withdraw additional amounts like the $10,000 to pay for your new bathroom those amounts will have their own fixed interest rate.
To sum up, benefits of a HELOC include:
- Flexible and easy-to-use
