If you own a home and have built up a healthy amount of home equity, you will be in a good position. You can utilize this equity to help you get a much lower mortgage rate when buying a new home. Or, you may be eligible for a lower interest rate to refinance your current mortgage loan.
What is Home Equity?
Home equity is essentially your property’s current market value compared to what you still owe on your existing mortgage loan. It is calculated by determining what it would realistically sell for in today’s real estate market and then subtracting that by the total principal you owe on your mortgage.
Let’s say you bought a $400,000 house in Atlanta five years ago with a 30-year fixed FHA loan. You paid the minimum FHA down payment of 3.5% ($14,000) and have been making your standard monthly mortgage payments on time since you moved into the home. As of right now, you still owe about $350,000 on your mortgage. However, your house has appreciated significantly in value over the past several years while the real estate market has been red hot. It is now worth $700,000 in today’s market conditions.
This leaves you with a home equity of $350,000 ($700,000 current value minus $350,000 still owed on mortgage). This puts you in a great position as a homeowner as your house is basically worth twice as much as what you owe on your mortgage. You will have some options to consider. If you are not planning to move or don’t need to access that home equity, the smartest thing to do is nothing. Let your home keep appreciating in value and let your equity grow even higher. It will only benefit you more in the future when you are ready to make a move.
Here are three common situations where your home equity can benefit you:
1. Buying a New Home
This is the most common scenario. You’ve outgrown your starter home and are ready to move up in a bigger or nicer house. You will be able to leverage your home equity as a larger down payment on your new home. In the situation above, you have at least $350,000 to put down toward the next purchase, so this gives you a lot of buying power.
You will have to decide if you want to sell first before buying, or you can make offers with contingencies (meaning your current house has to sell before the new purchase can be completed). Either way, you are rolling over that gained equity to help you get into a bigger and better property that suits your growing family’s needs.
2. Home Loan Refinance
Maybe you are content to stay in your current home and aren’t ready to move out. That’s perfectly fine. Your home equity may enable you to qualify for a lower mortgage interest rate. You could be in a great position to refinance. In most cases, a homeowner’s financial health improves over time. They are gaining home equity, but also increasing income and work stability. You may have a higher credit score and lower existing debt, as well. These are all beneficial when it comes to home loan refinancing.
The mortgage rate you qualify for will be affected by prevailing average interest rates, but your financial standing and home equity will help you lock in the lowest rate available to you at the time. If it is significantly lower, a home refinance may be a great option to consider.
A lower mortgage rate means you can reduce your monthly mortgage payments and/or shorten the remaining length of your loan. If you have 25 years left on your mortgage in the scenario presented earlier, maybe a refinance allows you to keep your monthly payments similar while refinancing your loan to a 15-year payoff period. You’ll be able to pay down your mortgage sooner without significantly affecting how much you have to pay each month.
3. Pull Out Some Cash
Life can be unpredictable and some homeowners may stretch themselves a bit thin. You may be putting every penny you have into your mortgage and other homeownership expenses, which has caused you to build up some other high-interest debts like credit cards or personal loans. Maybe you just have car loans or student loans you want to pay off. Another common challenge is unexpected medical bills after an accident or illness in the family. Whatever the reason, you have some other debts you want and need to eliminate.
You may be able to leverage your home equity and qualify for either a cash-out home refinance loan or a home equity line of credit (HELOC). These loan programs can allow you to pull out some of your home equity. In the case of a cash-out refinance, you could take out some cash while still refinancing at a lower mortgage rate. A HELOC, on the other hand, allows you to establish a line of credit based on your equity. Instead of a lump sum cash out, however, you will borrow funds only when you need them.
These funds don’t necessarily have to be used for paying down other debts. Many homeowners will get a cash-out refinance loan or HELOC in order to make home improvements. In other words, they are investing that money back into their houses. This helps increase its value (and their equity) even more.
If you don’t need the money, then you shouldn’t pursue a cash-out home refinance loan or home equity line of credit. Again, it’s best to let your equity keep growing as your property appreciates in value over time. If you have strong home equity and are ready to buy a new home, refinance your current mortgage or look into a HELOC or cash-out refinance in the Atlanta area, contact Moreira Team today.