Have you been thinking of tapping into your homeowner equity? Maybe you’re thinking of doing some minor to major remodeling? Adding a new room or maybe upgrading your kitchen? Well, you can always dip into your savings or checking account but once you pull out those funds they’ll be tied up equity in your home. But as a homeowner, a HELOC (Home Equity Line of Credit) offers real options without having to sell the property to access that equity.
How it Works
One of the ways to pocket some of the equity in the form of cash is to pull out cash during the process of a refinance. Let’s say your home today is worth $350,000 and you have a $200,000 mortgage. You’ve been following interest rates lately and decide it’s a good idea to refinance from your 30 year loan into a 15 year term, which results in lower interest paid over the life of the loan. But you have $150,000 in equity and you do want to upgrade your kitchen and take a nice vacation, too. So, instead of refinancing $200,000 you decide to take out a larger “cash-out” refinance in the amount of $230,000. After closing costs and the old mortgage is paid off, there is a little more than $25,000 that will be transferred to your bank account. You have a brand new 15-year mortgage and money in your pocket. While a refinance might be a good fit, a HELOC can sometimes be a better option.
Truth is, a cash-out refinance shouldn’t be taken if the primary goal is to pull out $25,000. A refinance, just like any other closed-end mortgage has closing costs. There will be lender fees and third-party fees that will directly affect the net amount available to you. If it makes sense to refinance regardless of taking out any equity, then it can be a good option but if refinancing doesn’t make sense, a cash-out refinance can be too expensive if the primary goal is to pull out $25,000.
Benefits of a HELOC
A home equity line of credit, or HELOC, is a low-cost, simple way to tap into your equity while leaving your current mortgage in place. A HELOC is what it says it is, it’s a line of credit. With a HELOC, you can pull out the funds you need when you need them and pay back what you’ve withdrawn in monthly payments or pay off the balance in full. It’s almost exactly like a credit card or any other revolving account.
Interest rates on HELOCs are extremely competitive when compared to other types of credit, such as a credit card. And because a HELOC is in fact considered a mortgage, the interest can be tax deductible. HELOC proceeds can be used for any purchase at any time. Buyers may also consider taking out a simultaneous HELOC while purchasing a new home.
If this is something you’ve been looking at, it’s time to call me and let me explain how the process works along wth the advantages and to see if a HELOC makes sense for your situation.