As a homeowner, you may be aware that one of the perks associated with owning a home is the ability to increase your equity over time. Some people will accrue an increasing amount of equity until and even after the home loan is paid off.
However, others will tap into the equity strategically to achieve specific goals. Many of these goals can improve your quality of life in some way.
When you understand what home equity is and how you may use it, you may be ready to explore some of the ways to tap into that equity.
What Is Home Equity?
If you are like many homeowners, you made a rather sizable down payment on your home when you initially purchased it. You may also make regular payments on your home mortgage to steadily reduce the debt balance that you owe. In addition, you may see that your property value increases over time.
Equity is the difference between the current value of your home and the amount that you owe on all debt, including first and second liens. You can see that the down payment at the time of purchase, your regular payments and property value appreciation all can work in your favor to build equity. In fact, if you spend a few minutes calculating the equity that you have in your home, you may be surprised by the amount of cash that you are sitting on.
How to Use Equity?
After you have determined that you have a large amount of equity in your home, you may be wondering how you can use it.
There are two primary ways to turn equity into cash, and these are through a refinance loan or by selling it. When you obtain this equity, it can be used for any purpose that you desire.
When selling a home, for example, you can use the cash return from equity as a down payment on a new home. Many homeowners may not be interested in selling, and if you fall into this group of homeowners, you need to understand what your refinance loan options are.
Funds from this type of loan are often used to pay off high interest rate debts or to make improvements to the home, which can further increase property value in many cases. However, you can also use the funds for investments, to pay for a child’s wedding, to take a nice vacation or to achieve other goals.
An Equity Loan
One type of home mortgage that you can use to tap into your real estate equity is a refinance loan. Through a cash-out refinance loan against your home, you will use the bulk of the funds to pay off your existing loans. The new refinance loan will then become the only loan that you have on the property.
The new loan may be as high as 80 percent of your home’s current value, and this is usually verified by an appraisal. You can crunch the numbers or use a cash-out refinance calculator to determine how much equity you have available through this type of financing.
Refinancing your mortgages into a single loan has many potential benefits to your personal finance situation. In some cases, you may be able to adjust the rate and term. By doing so, you may be able to pay the loan balance off at a faster rate, reduce monthly payments and pull equity out so that you can achieve other personal finance goals.
Each homeowner will enjoy different benefits based on their specific financial circumstances. You can speak with a loan representative or analyze the options on your own to explore the benefits that you may enjoy.
An Equity Line of Credit
An alternative to a cash-out refinance is a HELOC, which is an equity line of credit against your house. This type of loan may take the first position in some cases, or you may be able to keep your existing first lien in place.
If you keep your existing first line in place, this new line of credit will usually need to take the second position. This means that you should not have a second lien in place when you apply or that the HELOC will replace the second lien.
This is a unique type of financing because it allows you to take draws on the equity line over a pre-determined period of time. This may be ideal for those who do not need access to the lump sum of cash from a loan all at once.
For example, if you take draws from a HELOC over the course of six to nine months while renovating your home, you can potentially keep interest charges and even loan payments as low as possible. This is because your interest and loan payments will be calculated on the amount of money that you have taken out of the HELOC to date.
A Reverse Mortgage
A final financing solution available is a reverse mortgage. This option is available for older homeowners, and it allows you to receive regular monthly payments against your home’s equity rather than to make payments on a loan. In this way, you can use the equity in your home to enjoy stable income in retirement.
You should analyze the reverse mortgage costs and interest rates so that you find the right financing for your needs. In addition, you should understand what may happen to your home if you pass away before your spouse does or what may happen to any remaining equity in the home if you both pass away. After all, you may want to leave the remaining equity to your heirs.
To Sum Up
With several wonderful ways to tap into your real estate equity, now is a great time to explore these options in greater detail. You can also analyze your current equity and outstanding loan balances to determine if you may qualify for one of these loans.
Strategically using equity is a smart way to improve your personal financial situation in various ways.