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You Can Use Your Home Equity in 4 Ways
Having equity in your house can be used as a financial safety net for large purchases like auto repairs, debt consolidation, or educational expenses. The more your equity, the more money you can borrow in times of need. While it’s fantastic to be able to tap into your home’s equity when financial crunches strike, how do you go about doing so?
Buying a house is one of the largest investments most people will ever make in their lifetime. As a result of the high initial cost of a home, most buyers finance the purchase with a mortgage and add to their equity over time.
Home equity is the difference between how much of the mortgage you’ve paid off and how much you still owe on your house. If you have a mortgage of $100,000 and your home is worth $200,000, you have $100,000 in equity.
The ability to draw on accumulated equity is a significant motivator for saving and investing in real estate, as it may be used to fund large purchases like a kitchen remodel, credit card debt, or a child’s education. The more your equity, the more money you can borrow in times of need.
Paying down a mortgage is the first step in increasing home equity. One way to accomplish this is to make greater mortgage payments or a larger down payment. You can refinance your loan to see if you can reduce your interest rate or pay off your debt faster while interest rates are low. You can also wait for your home’s worth to rise on its own over time, or you can modify it to help it sell faster.
It’s fantastic to buy a property and watch your equity grow, but what happens if you suddenly need a large sum of money?
There are primarily 4 methods by which homeowners can access their home equity.
Finances taken out against a home’s equity
A home equity loan, also called a second mortgage, is a loan that is guaranteed by the value that you have added to your property. Getting a home equity loan means receiving a lump sum payment and agreeing to repay the loan over a set length of time for a set interest rate.
A home equity loan application can typically be submitted electronically or over the phone. The application process will ask you to detail your assets, income, and outgoings. After that, you’ll work with a loan officer to negotiate the loan’s conditions and set up a time for the property to be appraised. Before the loan’s final disbursement, an underwriter will check your finances and collect any further paperwork they may need to confirm the loan’s specifics. The whole procedure usually takes anywhere from two weeks to six weeks, give or take depending on the size and intricacy of the loan.
If you have high-interest debt and can afford to make a slightly higher payment each month, a home equity loan could be a viable alternative for you. Homeowners who wish to make renovations to their properties and who need access to a significant sum of money may also benefit from a home equity loan because of the availability of a lump sum payment.
Home equity loans and lines of credit (HELOC)
The main difference between a home equity loan and a HELOC is that the latter allows you to take out smaller amounts of money repeatedly rather than all at once. HELOCs, in contrast to home equity loans, carry a variable interest rate and require regular payments during the draw period. Once the draw time ends, you’ll be responsible for paying off your remaining balance and any associated closing expenses or fees.
Application for a HELOC is very much like that for a home equity loan. To begin, you will submit an application for a HELOC either online or over the phone. The next step is to provide documentation of your assets, income, and expenses. Lenders typically need borrowers to submit to a property appraisal soon after loan approval before funding can be disbursed. Assuming there are no unforeseen issues, you will be able to close on your loan and begin making draws from your HELOC. The closing process for a home equity line of credit (HELOC) typically takes about four weeks.
You should utilize a home equity line of credit for large, recurrent purchases like a car payment, medical bills, or a down payment on a new roof. Nevertheless, if you’re able to secure a better interest rate elsewhere, you probably shouldn’t get a HELOC.
Cash-Out Refinance:
For a cash-out refinance, the current mortgage is refinanced into a new, larger mortgage. Your net profit is yours to spend as you like or reinvest as you see fit.
Getting in touch with a refinance lender is the first step in getting a cash out. A loan officer will look over your application after they have confirmed your income, debt, and property value. If your cash-out refinance application is accepted, you will be required to have a property appraisal performed prior to closing. It normally takes between 30 and 45 days to complete the entire procedure.
Home renovation projects, paying off high-interest debt, and funding significant expenses like college tuition can all benefit from a cash-out refinance. On the other hand, some people use the money from a cash-out refinance to make a major purchase, like a second home.
Co-investment:
Co-investment, also known as shared appreciation, is a type of real estate investment arrangement in which you sell a portion of your home’s equity to an outside investor. The equity advance is repaid at the conclusion of the loan term, and the investor receives a portion of the appreciation in value of the collateral.
In order to apply for a co-investment, you must first locate a shared appreciation firm that is interested in purchasing a portion of your property. The corporation will agree to pay you a sum of money equal to a share of the equity in your home once you have provided proof of your income, expenses, and property data.
When one investor has a high amount of equity in a home but low liquid assets and weak credit, a co-investment arrangement can be a smart solution. Co-investment is a great option for those who need money for debt consolidation or emergency costs but don’t qualify for a home equity loan or home equity line of credit.
Best Three Home Equity Solutions
LendingTree
Lending Tree offers home equity loans for a wide variety of dwelling types, including single-family homes, townhouses, condos, MDUs, and mobile homes. Home equity lines of credit (HELOCs) and cash-out refinance are also available.
Fixed-rate home equity loans are available between 2.25% and 11.75% for terms of 15 years. Conversely, home equity loan interest rates might be anything from 2.99% to 5.75%. With a cash-out home equity loan, you can borrow up to 90% of your house’s value, regardless of how much equity you currently have.
A credit score of 620 is often required, along with a debt-to-income ratio of less than 43 percent. In order to apply for a home equity line of credit, home equity loan, or cash-out refinance with Lending Tree, you can do so online, over the phone, or in person. When applying for a mortgage, it’s important to be ready to disclose your income, debts, and property facts and to undergo a house appraisal.
Discover
To those in need of a mortgage, Discover provides financing for a wide variety of dwelling types, including single-family homes, multi-family dwellings, condos, and even mobile homes. No home equity line of credit (HELOC) options are provided, but both home equity loans and equity cash-out loans are.
The company offers fixed rates between 6.24% and 13.99% APR for home equity loans and cash-out refinance. The loan amounts range from $35,000 to $300,000, and the loan periods might be 10, 15, 20, or 30 years. Better yet, Discover doesn’t require any upfront payment for application, origination, appraisal, or closing costs.
Discover is available around the clock, seven days a week, both online and by phone, should you ever need a home equity loan. Details concerning the loan amount, its intended use, and your property’s worth will be requested during the application process. After you apply for a loan through Discover, a loan officer will be assigned to you who will gather your supporting paperwork, arrange for an assessment of the property, and otherwise see you through to loan closing.
Figure
Figure offers a variety of home equity loan options to people who own single-family homes, multi-family dwellings, or condominiums. While HELOCs and cash-out refinancing are not available, home equity loans are.
Rates for home equity line of credit (HELOC) refinance and cash-out refinancing start at 3% APR. A line of credit from Figure can be obtained for anything from $15,000 to $300,000 over 5, 10, or 30 years.
Figure allows borrowers to apply for a HELOC or cash-out loan online and obtain funds in as little as 5 business days. In addition to a credit score of 620, other requirements include payment of an origination fee of 3% to 4.99%. Most notably, Figure provides e-notary services and can provide a remote appraisal of your property’s worth, both of which speed up the closing process and reduce your costs.
Which of these strategies for accessing home equity best fits your needs?
Home equity loans can be used for anything from home improvements to debt consolidation to financing large purchases like college tuition or a wedding. How much equity you have, how much your property is worth, your credit history, and what you plan to do with the money all play a role in the type of home equity loan you’ll qualify for. The good news is that a loan officer can analyze your income, debt, and property worth to assist you choose the best course of action.
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