When money is tight, and you need additional funds, you have the option to take equity out from your home. Even though you have the opportunity to take out money from your home loan, it does not necessarily mean that you should.
Not all debt is bad, but it is best that you review all of your options before you sign any paperwork. If you want to pull equity from your home, you will want to keep on reading below. We will go over a few ways that you can do that and the pros and cons of each equity method.
Getting Equity From Your Home
There are several different equity methods that you can deploy to pull equity from your home, such as a cash-out refinance. Before diving into your equity financing options, it is essential to know a few facts about home debt.
Almost all home debts report your payment history to the major credit bureaus, with a few exceptions. If you have a blanket rental property loan or a reverse mortgage, these may not report your payment history to the bureaus.
Wondering what your home’s worth in the current market? Get a free online home valuation!
With this said, it is crucial that you make sure that you make your payments on time. If you miss any payments or default on your loan, it will negatively impact your credit score.
If you have a house worth $200,000 and you only owe $100,000 on your home loan, you can refinance your mortgage to pull out more money. A cash-out refinance is a good option, but it does come at a cost; higher monthly mortgage payments.
Pros of Cash-Out Refinance
A major pro of cash-out refinancing is that you can borrow at a fixed interest rate, which means that you have predictable monthly mortgage payments. Your interest rate or principal will never go up.
Lower Interest Rates
Lenders typically charge lower interest rates for home refinances than other loan options. This is because lenders get preference in the event that you foreclose or default on your loan. When you refinance your loan, you have the option to pull out a higher loan to value ratio as well.
Cons of Cash-Out Refinance
When you refinance your home loan, you restart your amortization from scratch. Most lenders use a simple interest amortization calculator to determine how much of your monthly payment goes towards the principal and interest of your loan.
At the beginning of your loan, almost all payments go towards interest, not your principal. Over time, that ratio changes until the end of your loan term. At that point, nearly all of your payments go toward your principal. Lenders love when people refinance on older loans because they get to start your amortization all over again, meaning that you are paying towards interest again.
Restarts Your Loan Countdown
If you are already 25 years into a 30-year mortgage and decide to refinance, you restart your loan term countdown. This means that instead of having only five years to go, you now have 30 years.
Home Equity Loan
If you already have a home loan, you have the option to pull out a home equity loan. A home equity loan, also known as a second mortgage, is a loan that allows you to borrow against your loan if you have positive equity.
The loan amount you receive depends on the difference between the home’s current value and what you owe. Most lenders approve candidates for 80% to 85% of the equity in the house. For example, if you own a home worth $200,000 and you owe $100,000, you may be able to receive up to $85,000.
Pros of Home Equity Loans
You receive approval for a home equity loan, and you may be able to budget better with this loan. If your home equity loan is on a fixed-rate loan, you will be able to predict your monthly mortgage payments.
Home equity loans also have generally lower rates than credit cards or other available loan options. If you decide to take out a home equity loan for repairs or renovations, you may be able to deduct your interest.
Cons of Home Equity Loans
Although there are many great benefits of taking out a home equity loan on your house, it is crucial to consider the negative side of this loan.
Home equity lenders make you pay your interest monthly. Although you will have a predictable repayment term, you will pay higher than you were before you took out the loan.
If you default on your loan, the home equity lender has every right to seize your property. Ensure that you can make payments on time before you finalize your loan.
It is important to note that you may need to repay the entire balance if you want to sell your home after pulling a home equity loan. Your lender may not release you if you do not pay the remaining balance in full.
Home Equity Line of Credit
A home equity line of credit, also known as HELOC, is a way for you to take out home equity without needing to pull out a second mortgage. A HELOC is a revolving line of credit secured against your home.
If you want, you can take out multiple loans over the term of your loan. This is considered a “draw period.”
Most lenders will send you a HELOC card that you can use as a credit card. With a HELOC, you can borrow up to 80% of your home’s value minus what you owe. At the end of your draw period, you will need to pay any outstanding balance.
Pros of a Home Equity Line of Credit
Home equity lines of credit are very flexible. Once you have access to the funds, you have the option to use the money whenever you need it. As mentioned earlier, you can take out as much as you need during your draw period.
This means you have an open line of credit during that time, and you’re only responsible for paying the interest.
If you want, you can pay down the balance during this time to give yourself more flexibility. HELOCs have lower interest rates because your home secures the loan.
Cons of a Home Equity Line of Credit
Although a HELOC has the flexibility you need, it can come at a cost. The interest may be low when you first borrow, but if the interest rate rises, you can expect to pay more interest on your loan than you intended.
There is a unique risk associated with HELOCs; frozen credit. Frozen credit happens when you lose equity in your home.
This means that if your home goes down in value, your mortgage lender can freeze your home equity line of credit. Even if you made your interest payments on time, your lender could still freeze your account.
HELOCs have a permanent occupancy clause that you will want to review before you take out your loan. When you have an active home equity line of credit, you will need to live in the home as long as you have the loan.
Traditional mortgage lenders allow their borrowers to move out in one year and keep the property as a rental, but you cannot do that with a HELOC. If you move out, your lender will close your line and credit and will demand immediate repayment.
Home Equity Alternatives
If you do not want to refinance your home or use a home equity line of credit, you have the option to sell your home. If you decide to sell your home, you have the opportunity to either sell the house on your own, or you can submit for an all-cash offer through an iBuyer.
What Is an iBuyer?
An iBuyer, also known as an instant or internet buyer, is a company that uses technology to generate a cash offer for your home. Many homeowners like to sell their homes to iBuyers because of how easy the process is.
There are usually only four steps that you need to take to complete the entire process. With an iBuyer, you have the opportunity to close on your home within 14 days or as long as 60 days.
Selling to an iBuyer
As mentioned above, selling to an iBuyer takes a few easy steps. Once you accept the offer from the iBuyer, you can move out whenever you want. You are in control.
Step One: Send In Your Information
Once you find a reputable iBuyer, you can reach out to them and request an offer. They usually ask that you input information about your home. They will also need your personal information, so they know how to reach you best.
Step Two: Review Your Offer
If your home meets the iBuyer’s criteria, they will send you their offer. You will have about five days, depending on your iBuyer, to make your decision. If you want, you can reach out to other iBuyers to see what they may offer you.
Your offer sheet will contain any closing fees or transaction fees. It will also include the amount of money that you are expected to receive at closing.
If there are any changes to your offer, the iBuyer will let you know immediately. You usually receive a quote back within 24 to 48 hours. Once you are happy with your quote, you can move on to the inspection.
Step Three: Schedule an Inspection
Your iBuyer will take care of the cost associated with inspecting your home. They want to take a look at your home to ensure that the information matches what you input on the application.
The iBuyer also wants to see if there are any repairs they will need to take care of.
If they find there are a few repairs needed, they will let you know as soon as possible. The iBuyer will deduct the repair amount from your net proceeds, and they will handle the repairs when you move out.
Step Four: Choose Your Closing Day
With any potential repairs out of the way, you can move on to pick your closing day! As mentioned earlier, you have the option to choose your closing day.
You have between two weeks to two months to move out from your home. After you close on your sale, you will receive your net proceeds within a matter of days.
Why Choose an iBuyer?
Most clients state that they like to use an iBuyer because of the convenience. You won’t have to worry about showing your home or keeping it as clean as possible.
You also won’t need to worry about dealing with home inspections from homebuyers who have federally backed loans. The iBuyer takes complete responsibility for owning, repairing, showing, and selling the home.
They have a team of people to take care of making sure your home sells. Once you accept your payment, you no longer have to worry about the house at all.
Certain to Sell
The best thing about partnering with an iBuyer is that your home sale is for sure.
For example, if an iBuyer agrees to make an offer on your home, you are guaranteed a sale. As long as you go through with the process and uphold the end of your bargain, you will close in no time and walk away with your proceeds.
Best Equity Method for Your Home
There are many different equity methods that you can use to pull out equity from your home loan. Before you settle on any of the methods above, it is best not to overextend yourself financially.
Request a cash offer now if you find that it is better for you to sell your home instead of pulling out equity. Our cutting-edge technology will make sure that you receive the best all-cash offer on your home.