When you own a household, you can borrow against its equity, which is important consideration to remember. You should know that the regular US household owner has approximately two hundred thousand dollars in equity, meaning you can tap a percentage for educational expenses, home improvements and many more.
The best way to learn everything about home equity loans is by checking here for additional info.
However, before you decide to do it, we recommend you to understand how each step functions and what options you can choose throughout the process. It is important to consider that your home will be on the line as soon as you do it, meaning you should ensure that the purpose of loan is clear and transparent.
The worst thing you can do is to tap the equity to go on vacation or spend it on unnecessary things. Instead, you should do something that will be worthwhile in a long run. Then you can determine whether you should take a HELOC, home equity loan, or other option that will meet your needs and requirements.
What is Home Equity?
You should know that a home equity is a portion of your household’s value you do not have to pay back to a lender. The simplest way to calculate it is by taking amount of your home’s worth and subtract it with the amount you currently owe on your mortgage. The result, you will get is a home equity.
For instance, if a current market value of your house is two hundred thousand dollars, and you have a hundred thousand dollars in mortgage, the equity you have is the difference between these two numbers, or a hundred thousand dollars.
You will start to build equity by making down payment on house. The higher down payment you make, the higher amount you will get, which is important to remember. At the same time, it will continue to increase as you make on-time payments.
In case you wish to build it faster than usually, you can make additional payments to a principal. Therefore, you can grow it due to increased values of properties from your area. For instance, real estate market can increase the overall value of your neighborhood or you can improve the property’s curb appeal.
For instance, you can use equity as a collateral to borrow money, which is less expensive than taking unsecured loan or using credit cards for making high-interest purchases.
Home Equity Loans
One way to take advantage of your home equity is by taking a loan. You can borrow the amount depending on personal factors such as income and credit score. Of course, you cannot take the 100% of it, since most lending institutions will cap it at eighty-five percent.
Compared with other options, you will get a lump sum, meaning you will get additional monthly payments for a particular period until you repay the entire thing plus interest rates. The main idea is that your home will serve as a collateral for the loan, meaning a lender can legally claim your property if you default. Most of them come with fixed interest rates.
It means you will get the same rate for the entire lending period, while the adjustable or variable rate option will change due to outside factors. Therefore, you will pay low or high monthly installments, which is something you cannot predict.
If you wish to ensure predictability and convenience, you should choose fixed rate. Although adjustable options come with lower rates at first, the percentage can increase during the loan’s life. Still, they are perfect for short-term financing.
Differences Between Cash-Out Refinance and Home Equity Loan
You can use cash-out refinance option, meaning you will take another loan which will be larger than a mortgage you are currently repaying. Therefore, you will repay the mortgage with a new one and use rest of the cash for anything you want. As a result, you will get another monthly payment, which we can call a new mortgage.
It is way better to get a cash out refinance instead of home equity loan, especially if your goal is to change the mortgage terms meaning you can extend the length or reduce interest rate. However, if you do not qualify for a refinance with better terms, you will end up with significant closing costs. In that case, we recommend you to take home equity loan instead.
Home Equity Lines of Credit (HELOC)
You should remember that a line of credit requires your home as a collateral as well. However, it functions as revolving credit, meaning you will get a limit and you can borrow repeatedly unless you reach it.
Generally, it comes with a draw period, which is a moment when you can borrow money, while paying interest on the amount you took. After that particular period, you must repay what you owe at once, or you can pay it back gradually depending on prior agreement.
The lender will provide you either credit card or checks you can use to access funds from HELOC account. In most situations, you will get variable interest rates, meaning the percentage can fall or rise depending on a situation.
Should You Choose HELOC or Home Equity Loan?
Both options are similar because you can take advantage of home equity. The main goal is to provide mortgage and income information, which will help you determine the best course of action. Still, people use them for different purposes.
For instance, a home equity loan comes in lump sum, meaning it is perfect if you need to purchase something expensive you cannot handle by yourself. Suppose you wish to purchase new appliances for kitchen, you can choose them and understand the overall amount you will spend for them.
Therefore, you should take a home equity loan to buy them at once, which you can budget with ease due to fixed interest rate and monthly installments. We recommend you to check out this link: https://www.finnlånutensikkerhet.com/ for more information about consumer loans.
You can also choose a HELOC option, meaning you can use it multiple time during the draw period, which will offer you additional flexibility similarly as a credit card. It comes with a benefit for financing ongoing expenses, especially if you are not certain how much money you need.
For instance, if you wish to remodel your garage, the first thing you should do is to pay a contractor to handle floor. Then you should install and buy new cabinets, hire a painter and get other expenses throughout the process.
A HELOC will offer you a chance to borrow money you need for each step without a need to estimate everything beforehand. Still, you should think twice before choosing either options, because you will place your house on the line and use it as a guarantee that you can repay the amount you take.