Unlocking Your Home's Equity: What's the Right Fit for You?
So what is the best way to access the equity now that we’re experiencing higher interest rates as a result of our current economic environment?
There are a couple of options to consider when accessing the equity in your home including a cash-out refinance, a home equity loan or line of credit. Choosing the right option for you depends on several factors, such as your current mortgage rate and term, how much equity you want to access, and your overall individual financial situation.
It’s important to talk with a trusted financial advisor to find a solution that best suits your needs, but here’s a quick look at the primary ways you could access cash through your home’s equity.
Refinancing your mortgage is typically a good option for getting cash out especially if interest rates are similar or lower than your current mortgage loan rate. However, if mortgage loan rates are much higher than your current rate, a cash-out refinance could mean losing your lower interest rate, a monthly payment hike and paying more in interest costs over the life of the loan.
Compared to a home equity line of credit or home equity loan, a refinance typically comes with a lower interest rate. Plus, the loan can be spread over a long length of time, i.e., 30 years, and you have one consolidated payment — both attractive to some homeowners and budgets.
Home Equity Line of Credit (HELOC)
A home equity line of credit is a revolving credit line with a variable rate. You access it as needed and pay as you go, similar to how a credit card works.
With a HELOC you have draw period, which is the amount of time you can draw on your line of credit – this is typically around 10 years. Once the draw period ends, you usually have up to 15 years to repay the borrowed funds.
Because you only draw what you need, this is a good option for someone who may have a home improvement or renovation project but is uncertain of how long the work will take or the exact cost.
A HELOC is a good choice for homeowners who want to keep their low mortgage rate intact. Also, with this option, you can borrow only what you need. Plus, your funds are available again once you’ve paid down the amount you’ve drawn. A disadvantage of a HELOC is its variable rate which can change on a frequent basis.
Home Equity Loan
A home equity loan is a separate loan from your mortgage — basically you’re taking out a second smaller fixed-rate loan.
Home equity loans are similar to HELOCs in that you borrow only from your equity and typically have somewhat higher rates than cash-out refinances and HELOCs. However, unlike a HELOC which you can draw on when needed, a home equity loan disburses the funds all at once. The benefit is you have a fixed-rate giving you a regular, predictable monthly payment.
Terms on a home equity loan can vary, so make sure understand your term and what you’re monthly payment will be. Also, you won’t have to replace a low interest rate on your mortgage if you take a home equity loan.
CommunityAmerica Hybrid Home Equity
While you weigh the pros and cons of refinancing vs a HELOC or home equity loan, CommunityAmerica has another option for you to consider – our Hybrid Home Equity which address homeowners’ diverse financial situations and cash needs.
The Hybrid Home Equity combines the flexibility of a home equity line of credit with the control of a home equity loan. Here’s how it works: You get a master line of credit with a variable rate. You can draw on your master line any time, at which point you can choose to lock in a fixed rate on any portion of the balance for an predictable, monthly payment.