When the Juice Is Worth the Squeeze: Ways to Tap Home Equity
The Beehive State’s property market has been hot for a while, and its outlook remains rosy even if experts believe that the growth of home values is going to slow down in the coming years.
Thanks to the housing boom, many Utahns have been savvy about real estate. One piece of evidence of it is the 0.6% mortgage delinquency in the state as of June 2018; the national average during the same time was 1.1%.
Tapping home equity is one of the benefits of being a property owner in the state. Reputable Utah mortgage lenders attest that it can be done in the following ways:
Mortgage refinance is a popular option to snag a lower interest rate or change the loan term from 30 years to 15, or vice versa. Another use of this option is to turn home equity to a check worth tens or hundreds of thousands of dollars while replacing the old mortgage with a fresh one.
This strategy makes the most sense if you are far from the middle of your fixed-rate mortgage’s amortization schedule. If your loan is close to being paid off, it is best to leave it alone and not disrupt the situation when most of your payments go toward the principal.
Furthermore, getting a more favorable mortgage rate via refinancing does not automatically translate to more savings. Take the closing costs into consideration, for these fees increase your overall cost of borrowing. If you do not have a lot of home equity, to begin with, the closing costs of your refi can eat into the extra cash you are supposed to receive.
Say you have already done the math, saw that the size of your home equity was worth the trouble, and figured out when exactly you would break even, make sure you stay put until that day. Otherwise, going through the loan application process all over again will be a waste of time.
Home Equity Loan
An excellent alternative to cash-out refinance is getting a second mortgage, especially if your current loan already has a reasonable interest rate. The interest associated with a home equity loan is usually higher, but it typically involves lower closing costs.
A home equity loan will work exactly like your current loan. You will receive the lump sum of funds, which you can use for whatever purpose. The second mortgage will have a set term, and its payments will be divided between the principal and the interest, as well as taxes and insurance, if applicable.
A home equity line of credit is more of a credit card than a mortgage. Generally, no actual cash will be released on approval, for it is up to you when to draw money whenever you need it. In most cases, the total amount of funds you can withdraw will be 85% of your property’s current worth minus your remaining principal balance. In other words, you can’t access 100% of your home equity.
A HELOC has no closing costs with a unique payment structure. It has a draw period and a repayment period. During the first phase, you should pay at least the interest of the money you borrow, and principal repayment is optional. During the second phase, you can no longer withdraw funds, and, if you are used to paying the interest only, the monthly payments can soar significantly with the addition of the principal.
Borrowing against your home equity is a convenient way to be financially flexible, but do it with caution. If you abuse it, your mortgage might sink underwater if local property prices drop when the real estate market crashes, like what happened over a decade ago.