If you need cash, you can tap into your home equity. Here are tips on capturing the equity in your home.
KEY TAKEAWAYS
Calculate your home equity by subtracting your mortgage and property liens from your current market value.
If you need cash, either take out a Home Equity Line of Credit (HELOC) or a Cash-Out Refinancing.
Tap into your equity to access needed cash without having to sell your home or take out a high-interest personal loan.
Debt consolidation means refinancing high-interest debt using a home equity loan.
HELOCs give you a line of credit on your home equity to use as needed for certain debts.
Lenders limits borrowing 100% from your home equity by allowing 80% to 85%.
Build your home equity faster by paying down your loan faster or adding to your home value by doing the right types of remodeling or home improvements.
Capture Equity in Your Home with Loans
A home equity loan is a fixed amount second mortgage repaid over years like 15 or 20 years. Just like your primary mortgage, the new loan is amortized with every payment divided between repaying the principal and the interest.
Expect the second mortgage to carry a higher interest rate than your primary because it is second to be repaid in case your home is sold through a foreclosure.
In 2021, U.S. homeowners with a mortgage (62% of all homeowners) enjoyed an increase of their equity by $2.8 trillion since 2020. This averaged around $51,500 equity gain per borrower nationwide. Californians averaged a gain of $116,200.
Extra home equity means you can tap into it for extra cash when needed. The most popular method is to take out a Home Equity Line of Credit (HELOC). Or, do a refinance to take cash out,
Home Equity Line of Credit (HELOC)
The HELOC gives you more flexibility than a cash-out refinance. That’s because it contains a revolving balance you can draw upon when you need cash. Similar to the way a credit card works, but with a lower interest rate.
Benefits of a HELOC - Normally, no closing costs occur with a HELOC. They also offer an adjustable rate which varies with the prime rate. This means that your rate rises or falls over the loan’s life. Often, the HELOC starts with a discounted rate in the beginning and increases after 6 to 12 months.
The HELOC contains two stages:
1. The first draw period and the repayment period. The draw period may last from five to 10 years where you can withdraw funds up to your line of credit and only make the interest payments.
2. The repayment period becomes the total amount you withdrew as a loan you repay with interest. The repayment period often becomes 10 to 20 years. During this period, you can’t withdraw any more funds.
Refinance Cash-Out
Refinance your home at its true value which includes the extra equity to cash out. You must pay closing costs which lowers your equity a little.
Which is Better: HELOC versus Refinance?
Before choosing between the two consider what you want to do with the extra cash. Also, your financial situation and your credit score affect which one to qualify for.
Here are two large factors affecting your decision: debt consolidation or lump-sum expenses. Let’s explore these two.
Debt Consolidation
Debt consolidation means combining individual debts by taking out a new loan to pay all them. Take several debts and combine them into a larger debt where the loan costs less and offers better payment terms like lower interest rates and longer time to repay. Also, this results in a lower monthly payment easing the stress on your budget.
People use debt consolidation for paying off student loans, credit cards, and other debts. You can apply through your credit union or bank for a consolidated debt loan. Or, use a mortgage broker to refinance your home.
There are two types of debt consolidation loans: unsecured and secured loans. A secured loan uses the borrower’s assets as security like a car or a house which get repossessed if you fail to repay the loan.
On the other hand, unsecured loans are not secured by assets which makes them difficult to get. Plus, they carry larger interest rates
Lump-Sum Expenses
A lump-sum loan payment is intended to pay for one expense rather than receiving installments to cover multiple expenses.
HELOCs
Some people use a HELOC as a consolidation loan to pay off outstanding debts. This allows the borrower to pay a lower interest rate than credit card debts and other loans like car loans. Also, you get more time to repay the debt.
HELOCs are also good for home improvements which raised the equity in your home as it increases in market value. Also, a HELOC is good for starting a new business which can raise your income to become more creditworthy.
How to Calculate Your Home Equity?
Home equity represents the cash value of your homeownership.
Here’s how to calculate your home equity:
Subtract your mortgage balance (plus other property liens) from your home’s current market value.
For example, if your current home value is $500,000 while you owe $200,000, this equals $300,000 in home equity.
$500,000 - $200,000 = $300,000
How Much Equity Can You Cash Out?
Lenders do not allow you to take a 100% loan on your total home equity. Most lenders allow from 80% to 85% of your equity. In the example above, this means:
$300,000 x 80% = $240,000.
How to Build Equity in Your Home?
Increase your home equity by paying down your mortgage faster. Unless your mortgage prohibits early and/or larger payments, you can pay more often (like bi-weekly payments instead of monthly or larger payments every month). This reduces your principal which goes towards increasing your equity.
Another way to increase your home’s value is to make improvements. Bear in mind, not every remodeling or home improvement increases value. You need to know what types of improvements increase value in your area. An example of a good way to increase the value of your home is updating the kitchen.
According to Forbes, “10 Ways To Add Value To Your Home In 2022” include:
Additional Dwelling Units (ADUs);
Updating bathrooms and kitchens;
Adding storage space;
Dedicated home office;
Adding outdoor space in urban areas;
Adding a home gym or wellness space;
Creating multipurpose spaces;
Adding a separate laundry room;
Add natural hardwood floors; and
Adding fine architectural details like millwork in bedrooms, Venetian plaster on range hoods, or arched built-ins to create a custom charm.
Note: Recent California laws allows thousands of homeowners to split their large residential lot into two and build ADUs for extra income and higher property value. Read about these laws:
Tips On Capturing Equity In Your Home – Conclusion
Use your home equity to take out cash to consolidate debts or pay off outstanding debts. Our tips on capturing the equity in your home explain both.
If you know the exact amount you need for your debts a cash-out refinance gives you that with fixed monthly payments at a fixed interest rate you can budget for.
The HELOC is a better option when you don’t know the exact amount allowing you to take out cash as needed.
Home improvements requiring a set amount to borrow make a cash-out refinance the best option (along with a home equity loan) than a HELOC. The right types of home improvements can raise the market value for greater equity in your home.
The Best Ways to Increase Your Home Equity
Increase your home equity in these two ways:
Pay off your mortgage – Either pay off your existing mortgage fully or make faster or larger payments. Every dollar you pay off your mortgage increases your equity by a dollar; and
Increase your home value – If you invest wisely with interior remodeling, you get a high Return on Investment (ROI) with raises your equity.
Thinking of Selling Your San Diego Home?
Another way to take out cash from your home equity is to sell while the market is hot. The San Diego County home market is sizzling with large buyer’s demand facing few homes available. The perfect time to capitalize on your home equity.
SoCal Lifestyle Realty provides experienced San Diego County Realtors to help you get the highest price for your home.
Contact us today to learn how much equity you have in the current housing market if you list it with us.