Three Ways to Take Out Equity to Pursue Your Goals
Equity – its the ‘automatic savings plan’ home-owners bank on (no pun intended) to accumulate personal wealth. Various contributors boost home equity: regularly paying down on the loan’s principal balance, adding needed renovations, and the predictable increase in a home’s market value, over time. Equity is, simply, the market value of a home minus what is still owed on the loan. On average, a home will appreciate in value at around 3.5% a year.
Liquidating Your Equity
One huge advantage of acquired equity is using it for financial emergencies or other reasons. With a home-equity loan, for example, medical bills can be paid, college tuition can be financed, and high-interest credit-cards and other debt can be consolidated into a single, lower-interest payment plan.
Here, we will take a peek at three ways you can take out equity to use as you need, or desire.
1. Home-Equity Loan – Good for $$ Needed Now
Home-owners can tap out their equity with home-equity loans that are, also, referred to as ‘second mortgages’. Home-equity loans have a set term, and money is 100% dispersed from the get-go with closing costs, attached. This is advantageous for borrowers who have an immediate and urgent need for a large sum of money. The interest rate is, usually, fixed but it can be set at a higher rate than the first mortgage. With that being said, the interest rates for home-equity loans are, typically, much lower than those attached to credit cards which means a home-equity loan could be a viable solution to consolidate or eliminate high-interest credit.
2. Home-Equity Line of Credit – Good for $$ Needed Periodically
With a home-equity line of credit, the borrower will, most often, be required to withdraw a minimum, initial amount and, then, draw on the remaining money, as needed. Payments that would include principal + interest would be made on only the amount, drawn. This is beneficial when cash is needed for on-again/off-again situations such as home improvements or launching a business. Another option involves paying only the interest on what is taken out each month with the understanding that the withdrawn money must be paid, in full, at the end of the term. To make a home-equity line of credit easy to use, a checkbook or debit card is issued for accessing funds.
3. Cash-Out Refinancing – Good for $$ Needed at Any Time
The details for a cash-out refinancing are simple: Your equity allows you to refinance your home for a greater amount and take the difference, as cash. What this does is pay the difference between the mortgage balance and the home’s value – it replaces your existing mortgage with a new home loan for more than you owe on the home. This is a great choice if one’s home has significantly gone up in value since a certain amount of equity accumulation is a prerequisite for this option.
One of the downsides of cash-out refinancing would be closing costs that can be steep. Also, one should expect higher interest rates since the loan would be of a higher amount. Borrowers can take advantage of cash-out amounts that are 80% to 90% of the home’s equity.
The earlier one purchases a home, the quicker one can start building wealth in the form of equity – a huge benefit of home-ownership that can help home-owners live and breathe a whole lot easier!