You know that if your home is worth more than the balance on your mortgage, you have equity. But you may not realize a Home Equity Loan, with closing costs and fixed principal and interest payments, is only one way to access that value. For some homeowners, a Home Equity Line of Credit is the easiest, fastest and least expensive path. For others, cash-out refinancing can be a great way to turn equity into cash, and move from a variable interest rate to a fixed rate at the same time. Each of these methods has benefits and drawbacks, depending on your financial situation.
Home Equity Line of Credit
According to Barbara-Jean DeLoria, Senior Vice President at Florence Bank, a Home Equity Line of Credit (HELOC) at Florence Bank is a credit line that can be used like a credit card. You can borrow up to 80% against the equity in your home, and access it when you need it.
There are no closing costs, and the required home appraisal is covered by the bank. Instead of paying principal and interest, as one would be required to do with a Home Equity Loan, the borrower pays interest only during the first 10 years and then moves into a 10-year repayment plan.
“It really comes down to cash flow. If you need cash flow to make interest only payments for a period of time, a line of credit is your best bet,” DeLoria said.
In addition to getting a HELOC for specific projects, DeLoria also says some homeowners simply like to have a safety net for those times they might need to put on a new roof, an air conditioner breaks, or some other big-ticket house need arises.
Further, some use it for what is known as a “bridge loan” to buy a new house. They use a line of credit from their current home to purchase a new house, and then pay off the Line of Credit once their previous house sells. “A bridge loan (or HELOC) in some instances is more affordable than refinancing due to the associated costs.” There are no additional fees associated with HELOCs through Florence Bank.
Another approach people take to turn their equity into cash is refinancing their primary mortgage and taking out additional cash.
In this situation a homeowner refinances their mortgage with a new one that has a higher balance than the old one, taking the difference in cash.
A cash-out refinance might be the preferred route for a borrower who can afford to make interest and principal payments and wants to take advantage of the lower interest rate compared to the variable rate HELOC.
This consideration is especially timely since rates have been rising and will likely continue to do so for some time.
“As interest rates rise, payments will increase,” she says. “That’s something homeowners should keep an eye on.”
So whether you’re looking for a way to:
• Pay for college
• Make home improvements
• Buy a new home
• Create a safety net
...it’s important to consider all the options and how each of their pros and cons will fit best with your financial situation. Talking with a mortgage expert like the ones at Florence Bank is a wise first step!