When you own a home, you are not only making an investment in your own future, you are also stuffing money into a giant savings back that is there if you need it. If you’ve owned your own home and lived in for more than a few years, you’ve probably become familiar with terms like “home equity loans” and “refinancing.” Given how low interest rates are right now (and given how badly banks need new business in terms of new lending), these show up a lot in the marketing for banks.
Refinance and take equity out
These two items are somewhat different, but they both have to do with tapping that “savings account” that is your home. If you bought your house back before the crash of 2008, then you paid somewhere a higher percentage than today’s rates even if you had solid credit. Now you can get a loan at an interest rate at historical lows. Even with fees, refinancing could save you a ton of money over the rest of the amortization of your loan.
A home equity loan involves a slightly different sort of scenario. You’re happy with the interest rate on your loan, but your son is about to head off to college, and you haven’t been able to qualify for the low-interest loans that some colleges offer because of your income. So you find out that you could take out a home equity loan for significantly less interest expense than what he would pay if he had a student loan. This is a situation in which this sort of loan would make sense. Let’s take a closer look at the difference between refinance and taking equity out.
A refinance involves finding another lender to give you a new mortgage with more suitable terms and pay off your existing mortgage. In some cases, your existing lender will switch out the mortgage and issue the refinance as well.
A rate and term refinance simply alters your interest rate and the term of the loan. Unless there are some fees due at closing, no money changes hands. A cash-out refinance gives you some of the equity in your house in the form of cash. That’s what you would use to pay for your son’s tuition, or to pay off some high-interest credit card debt, medical bills and other similar expenses.
Before you take on a refinance, though, make sure you know what he closing costs will be. Expect to pay around 1-2% of the loan amount in closing costs, which means that if you are refinancing, plan to stay in the house for at least another year to see savings.
A home equity loan has your property as its security, which is why it generally has a lower interest rate than unsecured credit, either in the form of a loan or credit cards. You can either take out a traditional loan, which means you get a check for an agreed sum and then start paying back that principal with interest over he agreed term. If you take out a home equity line of credit (HELOC), that’s more like a credit card. You have approval to take out a set amount of money, but you don’t have to take it out right away, and you don’t have to take it all at once. You have a set draw period in which you can take out money, and if you do take it out, after the draw period ends, you start paying it back. It’s important to remember that in urban and rural markets you can get as much as 80% of your home’s equity out in a loan, provided your credit meets prime lender requirements.
Both the home equity loan and the HELOC come with closing costs, and the bank will ask your documentation to show that you qualify for it. A home equity loan will usually have a higher interest rate than your initial mortgage. However, be careful about lenders who advertise an introductory rate, because that low rate can spike after the introductory time period (maybe six months or a year), leaving you paying much more.
What Is The Difference Between An Equity Mortgage And A 2nd Mortgage?
Answer; Nothing. Both mortgages use the built up equity in a property to obtain funding for their desired needs. The only difference is a 2nd mortgage specifies the position of the mortgage. Technically, an Equity Mortgage position can be 1st, 2nd, 3rd, 4th etc. Amansad Financial generally only provide private mortgages in 1st and 2nd position.
Ways To Take Equity Out Of Your Home
So you’ve been paying on your mortgage for over a decade now. You haven’t taken out open mortgages (because you didn’t like the higher interest rates) but you have socked away extra money so that at each mortgage renewal you’ve been able to make a bigger dent in the principal you need to roll into the next loan. Now, though, your daughter is about to head off to college, and you didn’t quite save enough to help her with tuition, fees, room and board.
Or maybe your husband has received a diagnosis of Stage III cancer. The treatments will be invasive and expensive. He will have to take an extended leave of absence from work, which puts you down to a single income while you’re making mortgage payments.
Or maybe you just got laid off from that middle management position that you had held for almost ten years. You’ve been looking for the last nine months, but nothing has come up to match your talents. Your wife has kept her job the whole time, so you’re not burning through your savings as fast as you might otherwise be, but you’re having a hard time making ends meet for the time being, and you’ve run up some big balances on credit cards, which carry a high interest rate.
All of these are good reasons to find out how to take equity out of a house. If you’ve been making those mortgage payments regularly for years, all that money is now sitting in your house – kind of like dollar bills locked inside a giant vault. If you need to use this money for something major that has cropped up – like the list of scenarios above – there are different options to help you take equity out of the house.
What Is Best Way To Take Equity Out Of Your Home
One of these is a home equity loan. Let’s say that you bought the house for $600,000 and have paid the mortgage balance down to $200,000. The home’s value has appreciated to $800,000, which means that you have $640,000 in equity (the difference between the appraised value and the mortgage balance owed). If your home is in a big city in Canada, prime lenders will generally let you take out a total of 80% of the home’s equity in loans. So, your balance of $200,000 would still give you $440,000 in borrowing room, because then you would still have $200,000 (20%) in equity. Private lenders on the other hand will generally max out at 75-85% in select urban communities, and 65-70% in select rural communities.
Obviously, you don’t have to take out the maximum amount. And if you want to have the money available to you quickly without having to start paying interest on a lump sum loan, you can also open what is called a home equity line of credit (HELOC). Imagine a credit card that uses your home’s equity as the available balance. In most cases, you have a draw period during which you can access this line of credit. At the end of the draw period, if you haven’t used any of the money, you don’t owe any interest or principal. If you have used some of the money, you have to start making payments on principal and interest – but just on what you actually used, not the amount for which you were approved.
Different ways to take equity our of your home or property
If you’re wondering if there are any other ways how to take equity out of a property, there is a cash-out refinance. In this case, you’re expanding your existing mortgage and taking the difference (after closing costs) in cash. So if you have that mortgage paid down to $200,000 and could borrow as much as $400,000 more depending on the loan to property value ration, what that means is that you could refinance, turning that $200,000 balance into $600,000, with the bank giving you a check for the $400,000 balance, less fees. Obviously, you’re signing up for bigger mortgage payments this way, or for a newly extended term of your loan’s amortization.
Many potential borrowers come to Amansad Financial every year asking “I don’t know how to take equity out of my house.” Amansad Financial niche market is sub-prime private lending. While this type of borrowing is not the ideal solution for everyone, the information is reviewed so that the best recommendation for their borrowing needs. If it is determined, that a private mortgage is not required, a partnering mortgage professional will take you through the prime lending options.
Equity takeout vs refinance
So how do you choose between equity take out vs refinance? Both have their advantages, and both have their drawbacks. In either case, you’re adding to what you owe on the balance of your home, so be careful, and only take out what you need. The scenarios that make either one ideal are slightly different, but if you have questions about your situation, call one of our refinancing specialists at Amansad Financial to get advice tailored to your needs.