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Home Equity, Mortgage & Home Buying

When Should I Tap Into My Home Equity?

If you’ve owned your home for a while, you’ve likely benefited from the double-digit increases in home values over the last few years. Assuming you aren’t ready to sell right now, there are opportunities to take advantage of that increase in wealth. But despite your access to more low-interest cash, it’s important to choose your equity product wisely and spend the funds responsibly.

Ways to Borrow From Your Home Equity

There are three main ways to borrow against the value in your home. Depending on the state of the housing market in your area, and your own spending and budgeting habits, not all are created equal.

Cash Out Refinance

With a cash out refinance, the homeowner refinances their first mortgage to a current rate and pulls out additional cash from the difference between what they owe and what the home is currently worth. The new mortgage payment covers that original loan balance plus the amount of cash they pulled out. The cash is then available for the homeowner to use as they see fit.

For the last dozen or so years, historically low interest rates made cash out refinances super popular because they not only gave access to the equity, but they lowered the interest rate on the initial loan in the process. Mortgage rates are higher this year as compared to the most recent past years, which means refinancing a current mortgage to a new one would likely increase the interest rate borrowers pay.

Home Equity Loan

A home equity loan leaves your first mortgage intact and allows you to borrow from the additional value your home has gained with a second loan. A home equity loan offers a lump sum amount at a fixed rate that you would typically repay over a period of 10 or 20 years. Upfront closing costs are typically waived. If you have a specific intent for the money and you want to have a clearly defined payback plan, a home equity loan could be right for you.

Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) is perhaps the lowest-cost and most flexible way to borrow from the value in your home. It typically offers the lowest interest rate at which to borrow from your equity, but it is variable, which means the rate could fluctuate as often as quarterly depending on the larger interest rate environment. With a HELOC, you can draw against your equity, as much or as little as you want, over a 10 year period, which is then followed by a 15-year amortized repayment period. Upfront costs are waived, as long as the loan is kept open for at least 24 months.

Essentially, a HELOC is similar to a credit card that you use to borrow and pay back. The difference is your house is used as collateral and a HELOC is usually at a lower rate. And just like a credit card, you need to have a payback plan so as not to get riddled with debt you can’t afford.

When to Tap Into Your Home Equity

If you want access to cash for an emergency, have other higher-interest debt weighing you down, or you want to invest in a home renovation, borrowing from your home equity might be the right choice for you. On the other hand, it wouldn’t be wise to use your equity to finance vacations or luxury purchases. Ultimately, the money you receive can be used however you see fit, but it’s important to have a plan and use it judiciously or you run the risk of falling further into debt without anything to show for it.

While home values remain high, it might be worth discovering how your equity can make your financial life simpler. If you want to discuss your options, your Credit Union is here to help. We have a variety of home equity options to fit your situation and we’ll guide you from start to finish through the process.

Contact one of our qualified Mortgage Loan Consultants today to learn more.

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