As the largest purchase most people will make in their lifetimes, a home is generally thought of as a sound investment because of the ability to build equity. Equity is the difference between what you owe and how much the property is worth. There are two ways to build equity:
- Make payments on the home to decrease the loan value
- The property value increases
The equity in your home can be used for a wide array of uses, such as helping to pay for a kid’s college, adding a room onto the house, paying medical bills, or just for an additional source of funds. In most cases, the equity in your home is one of the cheapest sources of funds you have. As a result, several people use home equity lending products and home refinances to cash in on this equity. Continue reading to learn more home equity lending products and home refinancing options.
Home Equity Lending Products
Home Equity Loan
A home equity loan is essentially a loan based exclusively on the equity in your home. Similar to a second mortgage on your home, these loans have fixed interest and principal payments every month. Home equity loans are disbursed as a lump sum based on a percentage of the equity you have in your home.
Home Equity Line of Credit
A home equity line of credit (HELOC) works similar to a credit card and allows you to withdraw money based on a percentage of the equity in your home. This lending product allows you to use funds, pay it back, and use the funds again during a specified period. While home equity loans have fixed interest rates, HELOCs have variable interests rates.
While home equity loans are designed to give a loan on the equity in your home, a home refinance allows you to refinance the entire mortgage. In most cases, refinancing your home is the better option if you need to borrow large amounts of money. At the same time, refinance rates are typically lower than home equity rates for larger amounts. When you refinance your home, you can also choose a longer payment period, such as 25 or 30 years. These longer terms may allow you to keep the payments lower and well within your budget.
Considerations for Refinancing Your Home
Anytime you refinance your home, you will pay appraisal fees and closing costs. In most cases, these closing costs can range anywhere from 3% to 6% of the total loan value. When you are considering whether to refinance your home or take out an equity loan, it’s vital to consider:
- The amount you need to borrow;
- The refinancing interest rate; and
- The amount of time you plan on staying in the home.
Home Refinancing Vs Home Equity Lending Products
If you have built up a significant amount of equity in your home, home refinancing may be the best way to go. Other reasons people choose to refinance is to switch from an adjustable rate mortgage (ARM) to a fixed rate loan or to simply take advantage of lower interest rates. On the other hand, home equity loans are best for those who are looking for a smaller loan for specific purposes. At the same time, if your initial mortgage has incredibly low interest rates, choosing a home equity lending product will allow you to still access the equity in your home without losing those favorable terms. If you choose to refinance, you will lose those favorable interest rates on your initial loan.