So home prices have gone up and now you have significant equity on your home. The question is, can you use this equity to say, increase your cash flow or fund an important household expense?
The answer is yes. There are various ways through which you can benefit from home value appreciation and take advantage of your property’s earned equity.
But first, let’s define terms.
Your equity is the difference between how much your home costs in the market, and how much you have left to pay on your mortgage.
Let’s say you took out financing for a home that costs $250,000 and you still owe your lender $150,000 worth of mortgage payments.
$250,000 – $150,000 = $100,000
The resulting difference ($100,000) is your home equity.
Let’s look at the various ways through which you can gain access to this equity.
If current mortgage rates are higher than when you first took out your mortgage, complete refinancing could be the most effective way to go. With a new first mortgage, you can “refinance” with a greater loan amount than your original mortgage. This way, you will be able to pay off the first loan, while taking home the extra in cash.
A Standard Second Mortgage
A second mortgage, just like a standard purchase loan, secures the mortgage against your home and grants you access to your equity by providing you a lump sum of money for whatever purpose you see fit.
These types of loans generally have higher interests as they are considered more risky than a first mortgage.
Equity Lines of Credit
Another way to use your home equity is through a line of credit that you use like a credit card. Unlike a standard second mortgage where you are given a lump sum at closing, your lender will give you a checkbook or a debit card which you can use to draw your funds from. You are given a limit and can continue borrowing until you reach the ceiling amount.
Finding a Lender
You can start your search via search engines online to localize your search, or here. You can also ask for recommendations from friends and family. Remember that you do not have to do repeat business with your original lender. You can inquire from your bank, your local lending entities, or your credit union, which typically offer more member benefits and lower interest rates.
Before you forward your application, prepare your documents first and check your credit score from annualcredireport.com. Remember that hard inquiries can pull your score down so be wise in narrowing down your list.
The financing process goes more or less the same with your first mortgage: income verification, credit check, LTV and DTI evaluation. Remember what you did right and learn from your previous mistakes. But first, see to it that the decision to refinance or take out a second mortgage is worth it. If it is beneficial for you in the long run, such as lowering your interest rate, saving you thousands of dollars on interest payments, the move could be smart. But if you’re only taking it out for short term fixes, you may be better off looking for other financing alternatives.