In this article
If you have lived in your home for several years, there’s a very good chance you have built up a significant amount of home equity. Your property has appreciated in value while you have paid down your original mortgage loan. In other words, your house is worth more than you owe.
There may come a time when you really need some extra cash. You might want to make some major home improvements. You may have some large bills or high-interest debts that you’d like to pay. Perhaps you want to help cover your family’s college or medical expenses. The point is that you could benefit from the money and you have a lot of it sitting there in your home equity.
There Are Five Common Ways You Can Cash-Out Some of Your Home Equity:
Which option is best for you and how much you can cash out will depend on several factors. These include how much equity you have, how much you still owe on your current mortgage, your qualified mortgage rate, and other mortgage loan qualification factors (credit score, income, existing debts, etc.). Let’s take a look at each home equity cash-out solution to help you understand the key differences.
1. Home Sale
This is the most obvious way to tap into your home equity. You can sell your house or condo. Your remaining mortgage principal balance and any closing costs/fees will be paid off. Then, any cash left over will be given directly to you. This is a great option if you are considering moving up to a bigger home or perhaps downsizing to a smaller home for retirement. Whatever you plan to do next, you will be able to cash out your home equity free and clear if you sell your home. What you do next is completely up to you!
If you want to stay in your home while tapping into your home equity, these next four solutions are worth considering.
2. Cash-Out Refinancing
For homeowners with a healthy amount of home equity and good financial standing, this is often the best cash-out solution. Cash-out refinancing allows you to refinance your existing mortgage loan (ideally at a lower qualified mortgage rate). At the same time, you can cash out a portion of your home equity in the form of a lump-sum cash payment. The old mortgage principal and cash borrowed will be rolled together into one new mortgage loan, with one monthly payment and a more favorable mortgage rate.
3. Home Equity Loan
Cash-out refinancing may not be an option for some homeowners. It may depend on how much home equity you have, as well as other factors like prevailing mortgage rates. A home equity loan may be a more viable solution during times when mortgage rates are higher or if your loan qualification standards aren’t as strong. A home equity loan is essentially a personal loan, also sometimes known as a “second mortgage.” You will use your home equity as collateral to qualify for the loan.
This loan will be separate from your existing mortgage, so you will have two monthly payments to cover and generally a higher interest rate on the home equity loan. Still, a home equity loan can be worthwhile if you need the cash or want to use it for something important like home improvements that can ultimately increase the value of your property.
4. Home Equity Line of Credit (HELOC)
Another option to consider is a HELOC. Rather than a lump-sum cash loan from the bank, your home equity allows you to establish a line of credit. You only withdraw funds when you need them and can take out as much as you want at any given time—within your total credit limit. Payback options can be more flexible compared to home equity loans and cash-out refinancing. Interest rates will generally be a bit higher. Home equity lines of credit are often best for homeowners planning renovations and/or multiple home improvement projects. Take out the cash as you need it and gradually pay it back, but don’t take out more than you require.
5. Reverse Mortgage
Homeowners over the age of 65 will likely have heard a lot of talk about reverse mortgages. There are some pros and cons to taking out a reverse mortgage. The first recommendation is to make sure you are working with a reputable mortgage lender. Ask a lot of questions and make sure you are getting favorable loan terms. Unfortunately, there are a lot of questionable lenders out there trying to take advantage of senior homeowners.
If done right, a reverse mortgage can be effective. It is a loan worth considering if you need some extra cash from month to month. It may help with general living expenses or family financial needs. A reverse mortgage can be available to a homeowner over the age of 65 who outright owns their home—or at least has a significant amount of the mortgage paid off. A reverse mortgage means the bank will pay you each month as if they are buying your house from you with a loan. And, that’s essentially what they are doing.
Reverse mortgages don’t have to be paid off until the property is sold or the homeowner passes away. The downside is it reduces the value of the house being willed to any heirs. You are borrowing money from your home equity now, but the loan will eventually have to be paid off by the next homeowner or when the house is sold.
If you have built up some good home equity in your Atlanta area home and are interested a cash-out loan solution to access some of that money now, contact Moreira Team today. Explore your lending options and figure out what’s best for you and your family.