Looking to cash in on the equity in your home?
Home Equity Loans and Lines of Credit
As a current homeowner, you may want to undertake a home renovation project or you might need cash for another financial goal. You may be hesitant to do a cash-out refinance, which is a refinance where you trade in your old mortgage for a new mortgage and receive cash back.
Luckily, you have options. Both home equity loans and home equity lines of credit (HELOCs) can help you get the money you need.
Home Equity Loan Vs. Home Equity Lines of Credit (HELOC)
Home equity loans are a second mortgage that allow you to use the equity in your home as collateral to borrow money. Homeowners who take out a home equity loan make monthly payments on the loan in addition to their mortgage payments. The monthly payments are made up of two items: principal and interest. The principal is the original amount that was taken out for the loan. The interest on the loan is fixed, meaning your loan’s interest rate won’t increase over time. So during the repayment period, you’ll be paying off the principal and any interest that has accumulated.
A HELOC is a type of second mortgage that allows you to borrow money against the equity in your home as a line of credit. You can use the equity in your home to pay for whatever you need, such as home improvements, education and consolidating credit card debt. The monthly payments are generally interest only payments based on the outstanding principal balance owed. The interest rate is variable, meaning it can changed monthly depending on the prime index. A HELOC often has a lower interest rate than some other common types of loans, and the interest may be tax deductible. Please consult your tax advisor regarding interest deductibility as tax rules may have changed.
Home Loan Refinance
Your home is an investment. Refinancing is one way you can use your home to leverage that investment. There are several reasons to refinance, including getting cash from your home, lowering your payment and shortening your loan term.
Refinancing the mortgage on your house means you’re essentially trading in your current mortgage for a newer one – often with a new principal and a different interest rate. Your lender then uses the newer mortgage to pay off the old one, so you’re left with just one loan and one monthly payment.
There are a few pros and cons of refinancing. You can use a refinance to make use of your home’s equity, get a better interest rate and/or lower monthly payment. A refinance could also allow you to remove another person from or add them to the mortgage.
But the upfront costs required for refinancing may mean the lower monthly payment isn’t worth your while. That’s why it’s important to understand the refinancing process and make sure it’s the right move for you.
Pros and Cons of Refinancing
Pros Of Refinancing
There can be major benefits of refinancing a mortgage, but the pros depend on the terms of the refinance and your individual situation and goals. And while you can get the following benefits from a refinance, there may be some trade-offs.
You Could Pay Off Your Loan Faster
You can refinance your mortgage into a new loan with a shorter term (for example, going from a 30-year loan to a 15-year). By shortening your loan term, you’ll gain more equity in the home faster and pay the loan off quicker. That means you’ll own your home free and clear earlier and reap such benefits as saving money on interest and having more money each month when you no longer have a mortgage payment.
You can refinance your mortgage into a new loan with a shorter term (for example, going from a 30-year loan to a 15-year). By shortening your loan term, you’ll gain more equity in the home faster and pay the loan off quicker. That means you’ll own your home free and clear earlier and reap such benefits as saving money on interest and having more money each month when you no longer have a mortgage payment.
You Might Spend Less Over The Life Of The Loan
When you shorten the length of time you take to pay off the loan, you shorten the length of time you pay interest on that loan, meaning you’ll pay less interest over the life of the loan. But what about if you don’t shorten the length of the loan? You could still end up paying less over the life of the mortgage.
If your refinance rates are low, you may be able to lower your interest rate. Since you pay interest until you pay off the loan, this will save you on the amount of total interest you pay over the life of the loan.
Cons Of Refinancing
Refinancing isn’t a good idea for everyone and there are several reasons not to refinance, depending on your situation. Below are some downsides to refinancing you may consider before applying.
Refinancing isn’t a good idea for everyone and there are several reasons not to refinance, depending on your situation. Below are some downsides to refinancing you may consider before applying.
You Might Not Break Even
While you may save money with a refinance, it’s important to remember that there are costs involved in refinancing that could potentially nullify this benefit or weaken it.
While you may save money with a refinance, it’s important to remember that there are costs involved in refinancing that could potentially nullify this benefit or weaken it.
Remember, too, that the savings are often long-term savings, so you’ll need to decide whether the upfront costs now will be worth the savings you’ll have to wait for in the future. This is especially important if you think you’ll sell or move before the breakeven point.
The Savings Might Not Be Worth The Effort
As you see in the example above, the savings from a refinance might be minimal and you’ll need to consider if they’re worth the work put into refinancing your loan and the length of the refinancing process. Even when the process is streamlined and smooth, it’ll still require some effort on your part, including applying for the new loan, providing financial documents and getting an appraisal.
As you see in the example above, the savings from a refinance might be minimal and you’ll need to consider if they’re worth the work put into refinancing your loan and the length of the refinancing process. Even when the process is streamlined and smooth, it’ll still require some effort on your part, including applying for the new loan, providing financial documents and getting an appraisal.
Your Monthly Payment Could Increase
If you refinance from a 30-year mortgage to a 15-year mortgage, your payment will likely increase because you are shortening the amount of time you have to pay off your loan.
If you refinance from a 30-year mortgage to a 15-year mortgage, your payment will likely increase because you are shortening the amount of time you have to pay off your loan.
Financial Calculators to help you
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