Let Your Home Assist You: 3 Ways to Take Advantage of Your Home’s Equity

If you are a homeowner and have been paying your mortgage consistently, you have most likely built-up equity in your home. With this equity, you can free up cash for other wants & needs, such as a home renovation, assistance with college tuition, or even a dream vacation. However, with so many refinance and loan options available, it is hard to know where to start. Let’s take a closer look at three options and the pros & cons of each.

Option #1: Cash-Out Refinance

A cash-out refinance is an entirely new loan that replaces your existing mortgage that’s larger than your current outstanding balance. Once the new loan closes, you will collect the difference (minus closing costs) in cash.

A cash-out refinance typically comes with a fixed payment and fixed rate but in a rising rate environment, an adjustable-rate mortgage (ARM) is something to consider.  If the interest rate on your cash-out refinance is lower than your existing mortgage, this could prove to be your best option. However, if you have an excellent rate on your current mortgage, it may not make monetary sense to refinance, especially since your loan term will start over once your new loan closes. If you are concerned about monthly cash flow, a cash-out refinance may make the most sense.

Option #2: Home Equity Loan

With a home equity loan, you are taking a fixed-rate loan against a portion of equity you have built in your home. Funds from this loan would be presented to you as a lump sum of cash for you to disperse accordingly. You then will have two separate monthly mortgage payments: one on your primary mortgage and one on your second mortgage.

If you know the cost of your project or expense or prefer the simplicity of a loan installment structure, a home equity loan may be the best option for you. However, these loans offer less flexibility than our third option (HELOCs) and payments are calculated on the entire borrowed lump sum amount whether or not you use it all.

Option #3: Home Equity Line of Credit (HELOC)

Like a home equity loan, a home equity line of credit (HELOC) taps into your home’s existing value to generate cash. However, instead of a fully amortized second loan, a HELOC is a secured credit line that you draw from and then pay back, similar to a credit card.

Unlike the home equity loan where you receive a lump sum upfront, you can draw funds from a HELOC on an as-needed basis throughout the draw period. This makes this option best for those that have recurring expenses, like tuition or medical bills, or are unsure of the overall cost of a project.

Additionally, for a HELOC here at Stillman Bank, you are only required to pay interest on the amount you have drawn during the draw period, which is ten years. After the draw period is over, the outstanding balance comes due and may require another refinance if you do not have the funds to retire the debt at maturity.  However, keep in mind that the interest rate for a HELOC is variable and could change depending on market conditions during the term of the loan. So before committing, make sure you understand how an interest rate change could affect your budget.

Final Thoughts

A cash-out refinance, a home equity loan, and a HELOC all have their pros and cons. Each option gives you, as a homeowner, the ability to turn your home equity into cash, which can make it possible to tackle home improvement projects, consolidate debt, and improve your overall financial situation.

Before committing to any of the above options, we recommend talking with one of our retail bankers or mortgage lenders about your goals so they can help you choose the plan best suited for your specific needs. Remember, your home is one of your greatest assets. Let it (and us) work for you!

Lindsey Stopa
Retail Banking Representative
NMLS No. 1841219

815-623-5887
lindseys@stillmanbank.com


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