If you find yourself in need of accessing the equity in your home, for purposes such as home improvement, a significant expense, a new investment or simply some additional funds you have three options to consider;
Home Equity Line of Credit (HELOC);
What it entails;
It provides you with a credit limit from which you can withdraw and gradually repay over a specified draw period typically spanning 10 or 20 years. While this results in payments it allows for gradual reduction of the outstanding balance.
Typically considered as a mortgage alongside your first mortgage a HELOC does not necessarily have to be structured this way. If you do not have an existing mortgage, in place it is possible to rely on a HELOC as your primary loan option.
Additionally many HELOCs offer a “fixed rate draw” or “fixed rate advance” option that allows you to borrow a portion of your HELOC balance at a fixed interest rate. This feature provides protection against rate increases. However it’s important to note that the rates for fixed rate draws are typically higher than the HELOC rates.
The interest rates on HELOCs are determined by adding the Prime Rate to a margin, which varies based on factors like your credit score and the amount of equity you have in your home. The Prime Rate can change as the Federal Reserve adjusts rates annually.
Benefits;
HELOCs are ideal for accessing cash when needed. Since you aren’t required to make payments until you have a balance on your HELOC it can remain as a loan with zero balance and zero payments until you actually need to use it.
When comparing HELOCs, with home equity loans it’s worth noting that in low rate environments like we’ve experienced since 2008 HELOCS generally offer interest rates.
Fixed rate advance options provide the opportunity to secure a fixed rate, for an one time expense, such as a home improvement project.
Cons;
1. HELOC rates are subject to adjustment. The Prime Rate mentioned fluctuates as the Federal Reserve adjusts rates often occurring during their eight meetings. In times of improvement HELOC rates tend to increase due to the rise in the Prime Rate. It is important to discuss with your lender the movement of your HELOC rates.
2. When you opt for an payment it can be spread over 20 years resulting in higher monthly payments. It would be wise to consult with your lender regarding payment options
3. If you plan on refinancing your mortgage the new first mortgage lender must obtain approval from the existing HELOC lender in order for the HELOC to be subordinate to the first mortgage lien position. This process may often take longer than a rate lock period allows for a mortgage. Could potentially be denied altogether. It is essential that your HELOC lender is aware of this timing issue, before proceeding with a refinance.
Home Equity Loan What it entails;
A home equity loan offers simplicity compared to a HELOC as it involves receiving a lump sum loan. This loan serves as a mortgage. Takes second place behind an existing first mortgage.
This is not the same, as a HELOC that can serve as your mortgage. If you fully own your home and need a lump sum of cash you would opt for a cash out refinance, which would become your mortgage.
When comparing rates between a home equity loan and a HELOC, the rate for a home equity loan is typically higher because it comes with a fixed interest rate while the rate for a HELOC is adjustable.
When comparing a home equity loan to a cash out refinance the rate for a home equity loan is generally higher because it acts as a mortgage whereas a cash out refinance serves as the mortgage.
Pros;
If your initial mortgage exceeds 80 percent of the homes value lenders require mortgage insurance a fee. For instance if you provide 10 percent down payment you could limit your mortgage to 80 percent and secure a home equity loan for the remaining 10 percent effectively bypassing the need for mortgage insurance.
Cons;
Unlike certain HELOC payments that decrease over time as you repay the loan balance payments, on home equity loans remain constant.Because it is a loan that is fully amortized your payment will always remain the same. As time goes on this payment will contribute more towards paying off the amount, than the interest but the payment itself will never change.
Cash Out Refinance What it means;
A cash out refinance refers to taking cash out of your home through a mortgage. If you fully own your home without any existing mortgage balance the entire amount obtained from a cash out refinance (minus closing costs) would be considered as proceeds. However if you already have a loan balance on your home from its purchase a cash out refinance would involve getting a new loan with an amount greater than the existing balance. The difference between the existing balances would then be considered as proceeds.
Benefits;
When comparing options such as cash out refinance HELOCs (Home Equity Lines of Credit) and home equity loans opting for a cash out refinance generally offers interest rates for accessing funds from your home.
Cash out refinances provide an opportunity to consolidate interest non housing debt, such, as credit card debts into a single lower interest home loan.
Unlock the secrets to realtor success by overcoming common challenges with proven solutions! Visit our website for more information.
Explore more about Reasons to Use (and Not Use) a HELOC