Once you start making the monthly payments on your mortgage loan, you'll also start earning equity. Your home's equity is the difference between the market value and the unpaid mortgage loan balance. As you keep paying your mortgage and the property value increases, the equity keeps growing. You can unlock your home equity by borrowing against it with home equity loans, lines of credit or cash-out refinance loans. Many homeowners choose to tap into their equity to pay for emergencies, home improvements, or to consolidate other debts.
Review your personal finances. Any route to unlock equity involves taking out a loan, so you'll need to have a good credit score and a good payment history on your current mortgage loan. Look at your last mortgage statement to find what the balance is. Subtracting this from the original loan amount will give you a rough idea of how much equity you'll be able to borrow against; however, the final value also depends on the current market value of the home.
Research the loan options available to determine which one meets your needs. Home equity loans and cash-out refinances borrow against the equity. Home equity loans, also called second mortgages, are second loans in addition to the existing mortgage loan. Generally they carry slightly higher interest rates than conventional mortgages with shorter repayment periods. A cash-out refinance loan is an entirely new loan. A portion of it is used to pay off the current mortgage, and the remaining is given to you as a lump sum of cash. Qualified homeowners can typically refinance at a lower interest rate than their current loan and possibly extend the repayment term.
Select a lender that offers the loan option you decide on based on your research. Start with your current lender, however you aren't required to go through them for a home equity or refinance loan. The internet is a valuable tool for finding lenders and quick information. However, you can reach out to local banks and credit unions as well for a more personal experience.
Complete the loan application provided by the lender. Provide any additional documents that might be requested, such as a pay stub for income verification. The lender will schedule an appraisal of the property to verify the market value.
Wait for the final approval decision from the lender and then schedule an appointment to meet with an agent to sign the loan documents. This is known as the closing. Home equity loan and refinance loan closings are very similar to the closing you attended for your original mortgage.
- The type of loan you chose to take to unlock your equity will depend on your specific needs and financial situation. It's common for home owners to use cash-out refinance loans to consolidate other debts, such as credit cards or student loans. Home equity loans are often used to fund remodeling projects or pay for your child's college tuition.
- Both home equity loans and cash-out refinances will have closing costs associated with them. On average, these costs are equal to a few percent of the loan's value. Therefore, a refinance usually has higher closing costs than an equity loan.
- Most lenders only allow you to borrow up to 85 percent of the equity via a home equity loan.
- CNN Money: Unlock the Value of Your House Americans Are Awash In Home Equity. Some Are Being Smart About Tapping It -- And Some Are Not.
- Bank of America: Home Equity
- Bankrate: When is Cash-Out Refinancing a Good Option?
- Mortgageloan.com: Cash-Out Refinance or Second Mortgage?
- Mortgage 101: Refinancing a Mortgage to Pay Off Debt
- The Truth About Mortgage: Cash-Out Refinance
- The Federal Reserve Board: A Consumer's Guide to Mortgage Refinancings
- Federal Trade Commission: Home Equity Loans and Credit Lines
- Creatas/Creatas/Getty Images
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