This may sound like a strange concept. Is it possible to cash out some of your home equity and turn it into future equity gains?
Yes, it is very possible, and there are many American homeowners who have taken advantage of this strategy thanks to cash-out refinancing and other home equity loan options. The key is in how you utilize any money you borrow from your existing home equity. You have to spend it wisely and invest it in home improvements or upgrades.
How Do Home Equity Loans Work?
On paper, it’s actually quite simple to understand. First, you use your current home equity (how much your property is currently worth minus the amount you still owe on your mortgage loan) as leverage for a new loan. We’ll discuss some of those lending options later in this article. This allows you to borrow cash from your home equity that you can then use to reinvest in your home.
Using Your Home Equity to Fund Home Improvements
Perhaps there are some structural renovations that need to be made to update the property. Maybe you want to do a major remodel or add onto your house. Or, there could be value-added upgrades you can make, like adding solar panels and battery systems, updating your HVAC system, or improving roofing, insulation, windows, flooring, kitchen, bathrooms, etc. You are putting your equity back into your property. Over time, these upgrades and renovations will boost the property value. You will eventually regain the equity you borrowed and, ideally, even more by the time you are ready to sell the house.
Long-Term Equity Gains
You are utilizing your home equity in the short-term to increase your equity in the long-term, all without having to dip into your own pockets to fund the home improvements. Tap into the equity you have already earned and use it to pay for the upgrades and renovations that you think will add to the home’s value. This last part is very important. Aesthetic touches like redoing the interior design really aren’t boosting the property value over time. We’re talking about floor plans that will be attractive to more buyers, added/improved living spaces, and structural/functional/energy-efficiency upgrades that will truly increase how much the home is worth.
Home Equity Loan Options
So, how do you tap into your home equity? First, you will need to have earned a good amount of home equity. The way home prices have risen rapidly in recent years, most homeowners are doing pretty well right now—as long as they’ve kept up with mortgage payments. When you apply for any type of home equity loan or line of credit, your mortgage lender will perform a home appraisal to determine its current real market value. They will then subtract the amount of your current mortgage principal balance to calculate your home equity. That will determine how much you can borrow for your home improvement projects.
Then, there are different types of home equity loans you can consider. Which is best for you may depend on a variety of factors, including your qualification standards. Beyond your home equity, your mortgage lender will review your financial situation. This includes your credit rating (FICO score), other outstanding debts, income and employment. The stronger your financial standing and the more equity you have in your home, the more lending options will be available to you—along with better mortgage rates, as well.
There are generally three lending solutions to consider when it comes to cashing out your home equity:
Cash-Out Refinancing—This is a mortgage refinance loan that allows you to cash out some of your home equity while refinancing your primary mortgage at a lower interest rate. The two amounts will be combined into one new loan with one monthly mortgage payment. This is usually the best option if you need a large amount of cash upfront, and if you have a strong financial standing that enables to you to qualify for a lower mortgage rate than you are currently paying.
Home Equity Loan—A home equity loan is also known as a “second mortgage.” This is a separate loan from your primary mortgage, so you will move forward with two monthly payments. The interest rates are generally higher compared to cash-out refinancing, as well, though that can depend on how much you want to borrow and what you are currently paying for your existing mortgage loan.
Home Equity Line of Credit (HELOC)—This is more like a credit card issued using your home equity as collateral. HELOC interest rates are also usually higher than cash-out refinancing, but lower than most home equity loans. Again, your personal rate may depend on a number of factors. This credit line allows you to borrow what you need when you need it, so you don’t have to take out all your money in one lump sum. This is sometimes great for home improvement projects if you are spreading them out over time. You generally have a certain period of time when you can borrow funds and then you pay the bank back over time with interest. You may have more flexibility with minimum payment amounts and when you have to start making payments.
Which Home Equity Loan is Best for Me?
Cash-out refinancing and HELOCs are usually the better two lending solutions to consider when looking to tap into your home equity for home improvement investments. However, home equity loans may be the only option available to some homeowners. Nonetheless, all can be very effective options if and when the money is spent on home improvement projects that ultimately boost the home’s value (and thus its equity potential over time). These loans can all pay for themselves—and then some—when the cash is used strategically.
To learn more about these home equity lending solutions and to apply for cash-out refinancing, a home equity line of credit (HELOC) or home equity loan in the Atlanta area, contact Moreira Team | MortgageRight today.