How to convert your home equity into cash
Understanding the financial world, the economy and world housing markets is a skill that smart homeowners possess. This is especially true when it comes to using this knowledge to their advantage. The opportunity for you to do the same follows below.
What is home equity?
Your home equity is the amount difference between the appraised value of your home versus the amount you owe on your home loan. Once you purchase your house, you immediately own a certain amount of equity in it. This percentage can be calculated as the down payment or the amount you paid upfront, over the figure you financed. As you make more payments toward your home loan, you automatically own more equity. Combine this with an appreciating property market and upgrades you make to increase your home’s value and the equity you are left with, may end up being considerably more than you anticipated.
Calculate your equity correctly
By subtracting your outstanding home loan balance from your property’s appraised value, you can determine the equity of your home. When requesting a loan from accredited lenders, it is important to note that they often cap their lending offers between 80%-85% of your equity. Your loan-to-value ratio is also assessed, with lenders considering how much you still owe on your home.
Steps to take equity out of your home: take your pick
Home equity loans
Home equity loans are usually set at a fixed amount, at a fixed interest rate and is repaid over a stipulated period of time. It is treated similarly to your initial home loan and often has a higher interest rate due to the risk involved. In the event of you defaulting on your home equity loan payments, the lender has a right to the proceeds of your home sale, after the first home loan lender recoups their money.
HELOC
A home equity line of credit (HELOC) works like a credit card. It has a revolving balance that is approved for a set amount of time. You do not have to use the entire amount, and you can use it however you need. The interest rate varies with the prime rate, however, some lenders can offer fixed rates. HELOCs are a convenient method of acquiring accessible funds. If you do choose this option, be prepared to accommodate strict interest rates and repayment schedules.
Cash-out refinance
This option allows you to refinance your current home loan for more than the outstanding balance, where you can take the difference in cash. This replaces your current home loan and is a great solution for those who can get a lower interest rate and need the cash for a single major expense.
Choose what’s right for your financial situation and lifestyle
It’s important to note that you should only borrow against your home if it’s going towards an essential payment such as paying off major debt, funding medical and educational expenses or home improvements. Maintaining a healthy credit score is a surefire way to get approved for future loans and helps banks and lenders trust you with repayments. Weigh up the pros and cons of your decision and prepare to manage the outcomes with efficiency. At REALGLEN Properties we believe in giving you the best advice concerning your real estate needs. Contact us today to get started on your journey.