Best Home Equity Loan Lenders – For many homeowners, the equity they have built into their home is their largest financial asset, usually accounting for more than half of their net worth. However, there is still confusion about how to measure equity and the tools available to incorporate it into an overall personal finance management strategy.
A three-part article explaining home equity and its uses, how to use it, and special homeowner options available to homeowners age 62 and older. The NRMLA has also produced an accompanying infographic to help explain home equity and how it can be used.
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According to the consulting firm Risk Span, Americans have huge equity in their homes. How much? A total of 20,100,000,000,000. That’s $20 trillion, $100 billion! And when we say untapped, we mean there is currently no equity
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Or usable, unless you want to extract it. Extracting capital from your home is a way to make this illiquid asset liquid and usable.
Equity can be used and used in many different ways. Which path is most beneficial will depend on the homeowner’s individual circumstances, such as age, assets, financial and family goals, and work or retirement situation.
Equity may be your greatest financial asset; your largest personal asset; and your protection against unexpected life expenses.
In “auditors’ talk”, equity is the difference between the value of an asset and the value of liabilities for that asset. In the case of equity, it is the difference between the current market value of your home and the money you owe it.
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For example, let’s say your home has a market value of $425,000, you’ve made a down payment of $175,000, and you’ve taken out a $250,000 mortgage. At this point, your equity is $175,000:
Now suppose ten years later you’ve paid off $100,000 of your mortgage principal. So your current equity is as follows:
When you have a mortgage, you still own the house and the deed is in your name, but the mortgagee does
On the property as it is collateral given to the lender as collateral for the loan.
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Every month when you pay off your mortgage, some goes towards interest, some goes towards property tax and homeowner’s insurance (unless you opted out of foreclosure taxes and insurance, which is allowed in some states), and some goes towards the down payment on the principal of the loan. Your equity increases each month by a payment amount that reduces your loan balance; however, the amount attributable to your monthly interest payments does not increase your equity.
Paying off some or all of your mortgage or other home-related debt will increase the equity in your home, but that’s not the only way equity can increase.
Another way is to increase the value of your home. This may be due to an increase in value in the general real estate market in your area and/or improvements you are making to your home, such as adding a room or porch or renovating the kitchen and bathrooms.
Keep in mind that home values don’t always go up. Most geographies are subject to cycles related to supply and demand and the state of the overall economy. During a major financial recession like the one in 2008-2009, most homes actually lost value, meaning their owners saw their home equity fall. As a result, some homeowners were “underwater,” which meant they actually owed more on the mortgage than their home could sell.
Cash Out Refinance Vs. Home Equity Loan Key Differences
There are several types of financial products offered by banks and lending institutions that allow you to use your own capital. These are loans that use your home as collateral and must be repaid. You’ll want to do your research to determine which type of loan is best for you, and take the time to compare interest rates and offers, as well as other features of each loan type, which may vary from lender to lender.
Here we provide a brief explanation of the three loan products and two additional ways to access capital – selling your home and buying a cheaper one or renting
Home Loan. That’s what it sounds like: a loan that uses all or, more likely, a portion of your accumulated capital as collateral. Repayment of principal and interest is made through specified monthly payments over an agreed period. A home equity loan now gives you cash, but it also adds a new monthly expense.
Home equity line of credit. It is often referred to by its acronym, HELOC. A line of credit is an amount that a bank or other financial institution agrees to make available when you ask to use them in part or in full at one time. You don’t have to ask the bank for a loan every time you need cash; instead, by establishing an equity loan, the bank has already agreed to borrow up to an agreed limit. Again, the loan uses the equity in your home as collateral. As long as the credit line is in place, you can withdraw money in any steps up to your limit and pay it back. Unlike a standard loan, which has a fixed principal and duration, with a fixed or variable interest rate, you only pay interest on the portion of the line of credit for the time you actually borrow the money.
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An important feature of HELOC is that it is usually structured as “open credit”, meaning that if you repay some of the capital you borrowed, you can borrow it again later if needed.
For example, your HELOC may cost $100,000, but you could only use $25,000 so far. So your current monthly payments and interest is only $25,000. This provides financial flexibility and peace of mind for many HELOC users. They know they have easy access to funds in an emergency or when an immediate investment opportunity arises. Like other types of equity loans, lines of credit are often used to improve the home itself, thereby increasing the value and therefore the homeowner’s equity. But again, when you use a line of credit, you’re also adding a monthly expense to your budget.
Payroll refinancing. Mortgage refinancing is the process of paying off an existing mortgage with a new one that has different terms and/or a larger loan amount. Homeowners can opt to refinance their mortgage to take advantage of lower interest rates – and lower monthly payments; extend or shorten the length of your mortgage – for example, refinancing a 30-year mortgage into a 15-year mortgage; switching from a variable-rate mortgage to a fixed-rate mortgage; or extracting capital from your home by refinancing your paycheck.
If your home has appreciated in value and/or you now have more equity in it than you did when you took out the mortgage, you may want to refinance and cash out. With this type of mortgage refinance, you apply for a new mortgage for more than what you owe on your home and take it out so you can receive the difference in cash.
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The proceeds are unlimited, but take into account that refinancing your payday comes with new closing costs, new interest rates, and a new repayment date in the future. And it will take time to rebuild the capital you took from your home.
Sell your house and buy a cheaper one. Many people reach a stage in their lives, such as after the children have left home, that they no longer need as much space. If you have accumulated significant equity in your current home, you can turn that equity into cash by selling your home and buying a cheaper one. You may have enough equity to buy a new home with all your cash, or you may opt for a smaller mortgage and lower monthly payment that makes the cash available for other purposes.
You sell the 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 it makes more sense to sell the house and rent it out. If you have an interest in the property you are selling, you can withdraw cash.
With all of these options, it always pays to be as educated and informed as possible and shop around for the best terms for your particular situation.
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Remember the $20.1 trillion untapped equity in the US? Nearly half of that, $9.57 trillion, belongs to people 62 and older.
If you are
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