At some point in your life, there will be a time when you need to raise funds. Maybe you have a baby on the way and need to pay for an extra room to be built onto your house? Or perhaps you have a business idea that needs investment but you can’t get a bank loan? Whatever the reason, if you are a homeowner, there is a solution. Here are four ways you can use your home’s equity to raise funds.
picture credit: Flickr
First of all, it is important to understand what equity is. Essentially, when you buy a home, you pay off the interest first. Only when that interest is paid off will you start paying off the amount you borrowed to buy the property. And, as soon as you have paid back more than the house is worth, you have equity. It’s important to understand that if you pull equity from your home, your home will be used as collateral to secure the loan. That means that if you default, you could end up losing your property.
A reverse mortgage is a good way for seniors to free up cash for their retirement. Many people also choose this option to help them pay for medical treatment. Using a reverse mortgage will give you a lump sum payment against the current value of your home. The loan is repaid either when your home is sold or it has not been your primary residence for longer than 12 months. Although they can free up large amounts of cash for borrowers, the drawbacks of a reverse mortgage can be severe. Make sure you are aware of the repercussions it can have on you and your children’s inheritance.
Home Equity Loans
Home equity loans are, in effect, second mortgage loans. They will come with a fixed rate, and can be borrowed for a specific length of time, which is usually set at fifteen years. Home equity loans are useful if you need a lump sum of cash, although as with all pulled equity, it is vital to keep up with your repayments.
Line Of Credit
A home equity line of credit (or HELOC for short) is similar to a normal home equity loan. However, there are differences. Instead of having a fixed rate, there are two different periods to consider: the draw period and the repayment period. Draw periods can last for anything for five to ten years, and during this time you can take out as much money as you like, up to the amount you are allowed to borrow. Once the draw period has finished, you can’t access any more of the money, and you enter the repayment period.
Cashing out means taking out a new mortgage to pay off your old one. In most cases, you will receive cash from the swap from the excess of equity, but you will also face charges and early closing costs. Whether this will work for you is dependent on how much of your mortgage you have paid off. If there is very little equity, you will not receive a large lump sum. However, it may be worth looking into if you can get lower mortgage payments, and it works out cheaper in the long term.
Hopefully, you will be able to make these equity loans work for you. But never forget, your home could be at risk if you don’t meet your repayments.