How To Pull Equity Out Of Your Home
There are different methods you can use to access your home equity. These include a HELOC, a home equity loan or a cash-out refinance.
Home Equity Line Of Credit (HELOC)
A HELOC is a type of second mortgagethat allows homeowners to borrow money against the equity they have in their home and receive that money as a line of credit. Borrowers can use HELOC funds for a variety of purposes, includinghome improvements, education and theconsolidation of high-interest credit card debt.
Pros And Cons Of HELOCs
As you might expect, there are pros and cons to taking out HELOC funds. One advantage is that they allow you to borrow over time, so you’re only taking the funds you need. This can help keep your monthly payments lower and help avoid unnecessary debt (and interest payments).
On the other hand, they can be expensive. You may be required to pay an application fee and attorney fees, in addition to conducting a title search and ahome appraisal. Also, your home is the collateral in these situations, and you could end up losing your place of residence if you find yourself unable to make payments on your HELOC.
You also need to keep an eye out for potential rate increases based on market fluctuation. If your rate goes up, or your draw period ends and you must go from making interest-only payments to full payments, that could add a substantial amount to your monthly payments.
Rocket Mortgage® does not currently offer HELOCs.
Home Equity Loan
A home equity loan enables you to use the equity you’ve built in your home as collateral to borrow money. These types of loans are often called second mortgages because they create another loan payment on top of your primary mortgage.
Home equity loans are similar to HELOCs in that they both allow you to access your home’s equity, but a HELOC functions more like a credit card while a home equity loan provides you with cash in one lump sum payment.
Pros And Cons Of Home Equity Loans
On the positive side of the ledger, a home equity loan is more affordable than a personal loan and comes at a fixed rate —unlike a HELOC, which often comes with an adjustable or variable rate that can change every month.
Home equity loans also tend to have lower interest rates than credit cards, which make them more affordable in the long term.
On the downside, however, taking out a home equity loan means you will have two mortgage payments.Also, the interest rate for a home equity loan is higher than a cash-out refinance, and the holder of your primary mortgage gets paid first in a foreclosure if you stop making mortgage payments. As a result, home equity loans are considered riskier for lenders.
Cash-Out Refinance
A cash-out refinance essentially gives you cash in exchange for taking on a larger mortgage. In other words, you borrow more than you owe on your current mortgage and pocket the difference.
Unlike when you take out asecond mortgage, a cash-out refinance doesn’t add another monthly payment to your list of bills — you simply pay off your old mortgage and replace it with the new mortgage.
Pros And Cons Of A Cash-Out Refinance
Some people are interested in cash-out refinancing because it sets a definitive mortgage payment and keeps it at that level. That’s not the case with some of the other options, which can carry variable — rather than fixed — rates.
On the other hand, your overall debt load will increase and you will have to pay closing costs — just like you did with your original mortgage. Also, lenders often require that you maintain at least 20% equity in your home after a cash-out refinance.
