Sometimes life has a way to springing unexpected situations on us, and during those times you may find yourself in need of more cash ASAP. Whether it’s a medical expense, tuition, emergency home repairs or a need to consolidate your debt, there are plenty of ways you can tap into your home’s value so you can use the equity you’ve built over time, and turn it into the money you currently need.
What Is Home Equity?
Home equity is the amount of ownership of your home that you’ve built up through the years as you made your mortgage payments. It can increase in two ways simultaneously: as you pay down your mortgage and as the home’s market value increases.
To calculate the equity you have built up in your home, take the appraised value of your home and subtract any outstanding secured debts against it (mortgage, HELOC, etc.). The total amount that you can borrow must be greater than or equal to any outstanding secured debt on the home.
How Does Borrowing Against Your Home’s Equity Work?
A home equity loan works similar to any other type of secured loan, but the main difference is that it uses your house as collateral. As part of this process, your lender will allow you to borrow a specific amount of money that’s based on the value of your home and you’ll be charged interest and have fixed installment payments to pay it back. In order to qualify, you need to own a house (which needs to be appraised by a third party), have paid off a significant portion of your mortgage and be financially secure enough to handle taking on more debt.
Pros Of Borrowing Against Your Home Equity
Depending on the amount of equity you’re able to tap into, the loan you receive could be significantly higher than what you might obtain through a personal loan. When you borrow against your home’s equity, your home is used as collateral, so it’s a lower risk scenario for lenders which means you can expect lower interest rates and a fairly smooth application process due to your existing lender relationship.
Cons Of Borrowing Against Your Home Equity
While borrowing against your home’s equity sounds much better than taking on extra debt, it’s still the same. If you’re not in a financial position to take on more debt, taking equity out maybe risky because your home is being used as collateral.
Options For Borrowing On Home Equity
Understanding how home equity works and what your options are, is an important part of the process as you’ll need to meet minimum requirements in order to borrow against your home equity using these options below:
Refinancing Your Home
A mortgage refinance is the process of getting a new mortgage for your home, whether it’s from your current lender or a new one. You effectively pay off the first loan in full by using the second (new) one which allows you to lock in with a better interest rate and a new loan term. Keep in mind, that if you’re refinancing prior to your existing renewal date, this process will include fees and penalties.
In order to pursue refinancing, both you and your home will need to meet some specific requirements regarding how long you’ve owned the home, what your credit score is, your financial history, how much home equity you have built up in the home and your debt-to-income ratio. While the minimum equity requirement varies by lender, you’ll typically need between 15% – 20% equity to pursue refinancing.
Getting A Second Mortgage
A second mortgage is an additional loan you take out on a property that is already mortgaged. For lenders, taking on a second mortgage is risky as they’re in second position on your title. This means if you default on your payments and the property gets taken into possession, the lender in first position with the original mortgage will always get paid out first. Due to this added risk, mortgage rates for second mortgages are always higher than principal mortgages.
Specific requirements for getting approved for a second mortgage will depend entirely on your lender. Be sure to do your homework and understand what’s required of you to qualify and how that may differ by lender. Typically, lenders will look at four areas across the board to determine if you’re a good candidate for a second mortgage: equity, income, credit score and property.
A reverse mortgage is a loan that you secure against the value of your home that gives you access to tax-free cash without mandatory ongoing payments. It’s designed for homeowners that are 55+ and it enables you to convert up to 55% of your home’s equity into tax-free cash you can use to pay for travel, education, home improvements, debt or whatever you like. If you qualify, how much you will actually get approved for will depend on you and your spouse’s age, the location of your home, the type of home it’s classified as, your home’s appraised value, your home’s condition and how much home equity you have accessible.
Home Equity Line Of Credit (HELOC)
A home equity line of credit is a revolving line of credit that lets you borrow the equity in your home at a much lower interest rate than a traditional line of credit. You’ll have to pay interest on the money you borrow through a HELOC but you’re able to borrow and repay over and over as you need cash, up to a certain maximum credit limit. The lender uses your home as a guarantee that you’ll pay back money that you borrow. To apply for a HELOC, you must have at least 20% equity built up in your home.
Whether you’re planning to borrow against the equity of your home or just want to learn more about the process, make it a point to check on your credit score regularly, create a realistic budget and understand all the costs/requirements associated with choosing to borrow against the equity of your home. Always consult a professional before you make any big decisions regarding your mortgage, as there are a lot of factors (and costs) to consider before you make your decision and a professional can help ensure you approach it wisely. Interested in learning more? Get in touch with our team to chat about borrowing against the equity of your home!