US Equity Advantage
| Oct 17, 2014
There are some key questions you should ask yourself before considering tapping the equity in your home [Part 1], which we reviewed in our blog. We also discussed how a HELOC can enable you to use your home equity to make home improvements, pay for education, or fund other personal financial needs. Now, here are three more strategies you can consider for cashing in on your home equity.
Like a HELOC, a second mortgage is a loan against the equity in your home. You may get this kind of loan from the company that owns your current mortgage or from another lender, and in many ways it operates similarly to your first mortgage. However, if you’re unable to repay your debts, the holder of the second mortgage is second in line — behind the holder of the first mortgage — to get repaid. Again, you’re adding to your overall debt and will be paying interest on the amount you borrow. It’s more common for second mortgages to carry a fixed interest rate, which does give you the comfort of knowing what your cost of borrowing the money is in advance, and that the cost won’t go up if interest rates rise.
Often used by older homeowners, the reverse mortgage is a way to use the equity in your home to pay for living or other expenses today. It’s often seen as a way to supplement retirement funds coming from savings, pensions and social security. When you took out a mortgage on your home, you promised to repay the lender by making regular payments. In a reverse mortgage, you receive money from the lender and generally won’t have to pay it back until you die, sell your home or no longer occupy it as a primary residence. There are several kinds of reverse mortgages, including home equity conversion mortgages (HECMs) that are backed by the federal government. You may also get a reverse mortgage through a private lender (a “proprietary” loan). If you choose this path, do your homework carefully, make sure you fully understand the terms of the loan and research the reputation of the company offering the loan. Be aware that reverse mortgages are often offered with a variable interest rate, meaning that unlike a fixed-rate second mortgage, the rate of interest charged on your reverse could go up, increasing the total amount that needs to be repaid and eating up more of the equity in your home when you (or your heirs) sell it. You may have to pay origination and other fees, so study the disclosures carefully.
Cash Out Refinancing
If your home has appreciated in value substantially since the time you bought it, consider cash-out refinancing as a way to tap that appreciation. In this case, you’re going to get a new mortgage on your home, pay off the old one and keep the difference between what the new lender is willing to lend on your home and what you owe the existing lender. If you have not yet taken advantage of the historically low interest rates available now, this may be a good option that gives you cash in your pocket and lowers your monthly payments at the same time. However, remember that when refinancing, if you take out a new 30-year mortgage, you are potentially resetting the clock. It will take that much longer to get out from under that debt, which should always be taken into consideration in terms of your retirement plan.
Accelerate Your Payments
If you decide on a HELOC, second or re-fi, you’re adding to your overall debt and therefore will be paying your lender more than they’re giving you. USEA can help shorten the term and lower the interest payments for many cash-out options. Consider enrolling in a bi-weekly repayment plan like US Equity Advantage AutoPayPlus. By simply making two half-payments every two weeks, you’ll pay down your loan — and rebuild the equity in your home — faster while also saving money on interest. Call us today and we'll show you just how much you may be able to save.