Home prices have been steadily rising for the last few years, and as a result, homeowners now have more equity than ever. In fact, according to property data firm Black Knight, total tappable home equity hit a record-high last quarter, clocking in at more than $6 trillion dollars.
If you’re one of the many homeowners who have seen their equity stake rise in recent years, then you’re in luck. For one, it likely means more in profits when you’re ready to sell.
But more than that, it also means a home equity loan, HELOC, or cash-out refinance could be a good option. All three allow you to leverage your home equity to pay for home improvements, cover medical bills or college tuition, or even consolidate higher-interest debts like credit cards and car loans.
Curious if one of these equity options is a good move for you? Let’s look at all three in more depth.
Home Equity Loans
A home equity loan is essentially a second mortgage. You’ll receive a lump sum based on your equity, and then you’ll pay the balance down (plus interest) month over month.
Pros of home equity loans:
Cons of home equity loans:
HELOCs, or home equity lines of credit, are similar to home equity loans in that they allow you to turn your equity into cash; however, there are a few key differences. For one, a HELOC doesn’t offer a lump-sum payment. Instead, it acts like a credit card. You’ll have a total line of credit you can pull from as needed — taking as much or as little as you like. You also won’t pay interest on the entire line, as you do on a home equity loan balance. Instead, you’ll pay for only the money you actually withdraw and use.
Pros of HELOCs:
Cons of HELOCs:
A cash-out refinance is a little different than HELOCs and home equity loans. Though your total equity does play a role, you’re not technically tapping it. Instead, you’re using a new mortgage loan to pay off your old one. The difference between the two loan balances is what you’ll “cash out” from.
Here’s how it works: Let’s say you have $125,000 left on your current mortgage. If you refinance into a $175,000 loan, you could pay off the first loan ($125,000), and leave $50,000 for home improvements or other expenses you might have coming up.
With a cash-out refinance, you’ll replace your current mortgage payment with a new one. Depending on what your new interest rate is, as well as your balance, the payment could be higher or lower than your current one.
Pros of cash-out refinances:
Cons of cash-out refinances:
Deciding Which is Best
All three options can be a good way to access cash when you need it, but the right choice really depends on your financial situation, your current loan, and your goals for the move.
You’ll want to think about:
Are you considering leveraging your home equity with a HELOC, home equity loan, or cash-out refinance? Contact a loan officer at Premier Nationwide Lending today. We’ll help you determine the best option for your goals and budget.
Premier Nationwide Lending is an Equal Housing Opportunity lender. Sponsored by NTFN, Inc. 6201 West Plano Parkway, Suite 100, Plano, TX 75093 | NTFN NMLS 75333.