No Cost Home Equity Loan - For many homeowners, the equity they have built up in their home is their largest financial asset, typically comprising more than half of their net worth. However, confusion persists about how to measure real estate assets and the tools available to incorporate them into an overall personal financial management strategy.
A three-part article that explains home equity and its uses, methods to take advantage of it, and special home equity options available to homeowners 62 and older. NRMLA also developed the accompanying infographic to help explain housing equity and how it can be used.
No Cost Home Equity Loan
According to consulting firm Risk Span, Americans have a large amount of equity in their homes. How much? Total $20,100,000,000,000. That's 20 trillion, 100 billion dollars! And when we say "unexploited", we mean that equity is not currently happening
Home Equity Loans
, or usable, unless you make the effort to remove it. Taking equity out of your home is a means of making this illiquid asset liquid and useful.
Home equity can be leveraged and used in a number of ways. The most beneficial form will depend on the owner's individual circumstances, including age, wealth, financial and family goals, and employment or retirement status.
Home equity may be your largest financial asset; your largest component of personal wealth; and your protection against unexpected living expenses.
In "accountant speak," equity is the difference between the value of an asset and the value of the liabilities relative to that asset. In the case of home equity, it's the difference between the current market value of your home and the money you owe on it.
Cash Out Refinance Vs. Home Equity Loan
Let's say, for example, that your home has a market value of $425,000, you have a down payment of $175,000, and you took out a $250,000 mortgage. At this point, your net worth is $175,000:
Now, say, ten years later, you've paid off $100,000 of the principal balance on your mortgage. So your current real estate assets are:
When you have a mortgage, you still own the home and the deed is in your name, but the mortgage holder has a
To the property because it is the collateral that has been pledged to the lender to secure the loan.
Requirements For A Home Equity Loan And Heloc
Each month, when you pay a mortgage, some goes toward interest, and some goes toward property taxes and homeowners insurance (unless you've waived a tax and insurance deposit, as is allowed in some states ), and a part is used to reduce the principal balance of the loan. Your principal increases each month by the amount of your payment that reduces your loan balance; the amount that is attributable to the monthly interest payment, on the other hand, does not increase your equity.
Paying off some or all of your mortgage debt, or any other debt you have on your home, will increase your home equity, but it's not the only way to grow your equity.
The other way is for the house to increase in value. This could be due to increased values in the general housing market in your area and/or improvements made to the home, such as adding a room or porch or remodeling a kitchen and bathrooms.
It is important to remember that the value of the house does not always increase. Most geographies go through cycles, which have to do with supply and demand and the general state of the economy. During a severe financial recession like the one in 2008-2009, most homes lost value, meaning their owners saw their equity dwindle. As a result, some homeowners were "underwater," meaning they owed more on their mortgages than they could sell their homes for.
Home Equity Line Of Credit
There are several types of financial products offered by banks and lenders that allow you to tap into your home equity. These are loans that use your home as collateral and will have to be repaid. You'll want to do your research to determine which type of loan is best for you, and also take the time to compare interest rates and offers, as well as other features of each type of loan, which can vary from 'one lender to another.
Here's a brief explanation of three home equity loan products plus two additional ways to access your equity: sell your home and buy a less expensive one or rent it out.
Housing loan. That's what it sounds like: a loan that uses all or, more likely, a portion of your accumulated principal as collateral. Principal and interest are paid in specified monthly payments over an agreed period of time. A home equity loan gives you cash now, but it also adds a new monthly expense.
Home equity line of credit. This is often referred to by its acronym, HELOC. A line of credit is an amount of money that a bank or other financial institution agrees to make available to you when you request to withdraw it, either in part or in one lump sum. You don't need to take out a loan from the bank every time you want cash; however, by establishing the home equity line of credit, the bank has already committed to lending to you, up to an agreed limit. Again, the loan uses the equity in your home as collateral. As long as the line of credit is active, you can continue to withdraw funds in increments of any size up to your limit and pay them back. Unlike a standard loan, which has a fixed principal amount and term, with a fixed or variable interest rate, you only pay interest on that portion of the line of credit for as long as you're actually borrowing the money.
Main Things You Should Know About Home Equity Loans
An important feature of a HELOC is that it is usually structured as an "open-end loan," meaning that if you pay back some of the principal you borrowed, you can borrow it again if needed later.
For example, your HELOC may be $100,000, but you may have only used $25,000 so far. So your current monthly payments and interest are only on the $25,000. This provides financial flexibility and peace of mind for many people using HELOCs. They know they have easy access to funds if an emergency arises or an immediate investment opportunity arises. Like other forms of home loan, lines of credit are often used to improve the home itself, thereby increasing the value and, consequently, the owner's equity. But again, when you use the line of credit, you also add a monthly expense to your budget.
Outbound refinancing. Mortgage refinancing is the process of settling an existing mortgage loan with a new one that has different terms and/or a larger loan amount. Homeowners can choose to refinance their mortgage to take advantage of lower interest rates and lower monthly payments; increase or decrease the term of the mortgage, for example by refinancing a 30-year mortgage into a 15-year mortgage; switch from an adjustable-rate mortgage to a fixed-rate mortgage; or to take equity out of the home by doing a cash-out refinance.
If your home has appreciated in value and/or you now have more equity than when you took out the mortgage, you may want to refinance and take cash out. With this type of mortgage refinancing, you're applying for and taking out a new mortgage for more than you owe on the home so you can receive the difference in one cash payment.
What Is A Home Equity Loan And How Does It Work?
Earnings are unlimited, but you should keep in mind that cash-out refinancing comes with new closing costs, new interest rates, and a new, later payment date. And it will take time to rebuild the equity you have removed from your home.
Sell your house and buy a less expensive one. Many people reach a stage in life, such as after the children have left home, where they no longer need as much space. If you've built up significant equity in your current home, you can turn that equity into cash by selling the home and buying a less expensive one. You may have enough equity to buy the new home with all cash, or you may opt for a smaller mortgage and lower monthly payment that frees up money for other purposes.
Sell your house and rent. While home ownership is a significant investment for most people, it also represents a significant ongoing expense in terms of maintenance, property taxes and insurance. Sometimes selling your home and renting it out makes more sense. If you have equity in the home you're selling, you can cash out.
For all of these options, it always pays to be as educated and informed as possible and shop around for the best deal for your particular situation.
Second Mortgage Vs. Home Equity Loan
Remember that figure of over $20.1 trillion in total untapped US domestic capital? Almost half, $9.57 trillion, belongs to people 62 and older.
If you are
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