As you continue to make your mortgage payment each month, the balance (although seemingly slowly) decreases as the home value rises each year, continuing to build equity. When you have important financial milestones come up such as your daughter’s wedding, a kitchen remodel, or even a large much-needed family vacation that you need to pay for, you may not have the accessible funds sitting in an account, so this way you can borrow against your home. While a cash-out refinance may be one option to secure these needed funds, a home equity loan may be an option instead of going through the refinance process to pull cash out. Still debating your options? Read on below for further clarification, and stop by Home Equity Wiz for their immense amount of free resources to understand the intricacies of the home equity loan process better.
How Does it Work
With the 80% loan-to-value rule in mind, meaning what you owe compared to the value of your home, will need to be 80% or less for typical home equity loan approval. If the value of your home is $200,000 and you owe $120,000, you would be able to borrow up to $160,000 of your home’s value, so in this example, could apply for a home equity loan up to the amount of $40,000. From here there are a couple options, either a home equity loan that has a set loan amount, rate, and terms over the life of the loan, or a line of credit, which sort of works like a credit card in that you are approved for a specific line amount and can borrower as you need, paying back only what you borrow. While a home equity loan is fixed, a line of credit typically has a variable interest rate.
Benefits Over a Traditional Refinance
If you remember going through the purchase or refinance process, it may seem like pages upon pages of documentation is needed to gain approval on the value of your home, and that’s even with good credit, a low debt-to-income ratio, and sizable assets. Home equity loans still require approval based on credit, income, and assets, but is more of a streamlined approval process, not to mention paperwork at closing. The costs associated are also in favor of home equity loans, as with a traditional mortgage you will need to pay the lender and title company, but here there may only even be an application fee and drive-by appraisal cost.
Does Taking Out a 2nd Mortgage Make Sense?
There can be negative connotation with taking out another mortgage, but in fact, it can be a great way to secure funds without the need to put on a higher-interest credit card, with lower payments spread out over 10-15 years. This can especially help out your finances if used to consolidate debt that will eventually save you money in interest over time. As far as the costs go, with a cash-out refinance you can expect lower payments as the difference is spread out up to 30 years, but you’ll have to see if the time you plan on being in the home is worth all of the closing costs compared to a home equity loan. You will certainly have to weigh the pros and cons, so it’s a good idea to go over each option with a mortgage professional.
