So, you bought your home a year or two before the pandemic or before prices took off, and you are sitting on a lot of equity. You probably even had plans to upgrade your home and change or fix that outdated bathroom or kitchen, and you never got to it. In this Buyer 101, we will go over some options for you to consider to tap into your home equity to remodel and improve your home. Before we go over those options, please note to always speak with a trusted and licensed lender to see how these options could work for you. They will be able to help you select the best option, see if you qualify, and what costs may be involved.
A HELOC is a Home Equity Line of Credit. It is a type of equity loan that lets you withdraw funds when or as you need them and repay them at a variable interest rate. A HELOC is an excellent tool for anyone needing funds for ongoing home projects or needing more time to pay down existing debt. Once you pay back your balance, you can pull from the line of credit to start your next project. HELOCs typically have a lower interest rate than other home equity loans or personal loans. Check with your lender to see current rates for your situation (keep in mind to get the best rate you will need a high credit score, a low debt-to-income ratio and a good amount of equity in your home).
Home Equity Loan – A Home Equity Loan is like a HELOC since they both use your home as collateral, but a Home Equity Loan is repaid as one lump sum at a fixed rate. This sum is paid back over time just like a typical mortgage would and can be set to last for up to 30 years. The same applies to this type of loan; the higher your credit score, the lower your debt-to-income ratio will secure you the best rates.
Cash Out Refinancing – Cash Out Refinancing is just like it sounds; you are cashing out the equity in your home and setting up a new mortgage. This type of equity pull allows you to tap into that equity now instead of waiting until you sell. You will only be able to tap into about 80% of the current appraised value of your home, but it does get cash to you quickly. The new loan will most likely be on different terms than your existing mortgage, with a new rate and even a shorter duration if you choose. Starting with a new 30-year note is also a possibility. Lastly, cash-out refinancing allows you to use the funds for home projects but also to consolidate higher-interest loans or other financial goals like investment properties.
All three options above are a great way to improve your home while the market is shifting. Whether you want to get your home ready for when you want to sell and move to an even better home, check with your lender to see if these options will work for you of if they have other programs or lending products that may work better for your situation. If you don’t have a trusted lender, reach out to us at The Neighborly, and we can get you in touch with local lenders to help.