You've been in your home for a while and want to build an addition or make some major and expensive improvements. You have built up a fair amount of equity, the difference between what you owe on your mortgage and what the house is worth. You have three ways to tap that equity to get the cash you need if you are current on all payments. Each "cash out" option has advantages, so choose the one which best fits your needs.
Determine how much equity you have by comparing your current loan balance with the amount your house is worth. For example, if you now owe $100,000 and your house is worth $250,000, you have $150,000 in equity. Find out current value from an appraisal or comparison with current comparable sales. Decide how much you want to take out.
Get a home equity line of credit to tap your mortgage availability for the easiest way to take cash out. Apply to your current lender for a credit line, below the amount of equity. Borrow all at once or in stages; you take money from a credit line as you need it and pay it back as you can, with no fixed term or regular payment. A home equity line of credit has a fairly short term, usually only a few years.
Take out a home improvement or home equity loan, basically a second mortgage, for the amount of cash you need. Apply for this much like you applied for your original loan, except with different interest and terms; you'll usually have higher interest but a shorter term, so you won't be paying interest as long.
Do "cash out refinancing" by getting a new mortgage that pays off your existing one and gives you cash for some of your equity. Apply to your current lender or another one offering better interest rates; you may be able to get better interest on the original amount as well as the cash out. Provide all the financial information and other data just like you did for your original mortgage. Change the term if you want to get a lower monthly payment, a good option if you think you will sell the house before the mortgage is paid off.
Weigh the options: Flexibility with credit line, short term with home equity loan, lower interest but longer term with refinancing. Discuss all possibilities with your lender and compare rates and terms of other lenders before deciding which way to go. Be prepared to pay several hundred dollars in closing costs if you choose full refinancing; you can add this amount to your expanded loan.
Items you will need
- House appraisal
- Jupiterimages/Comstock/Getty Images
- How to Switch From a Variable Rate to a Fixed Rate in a Home Equity Line of Credit
- How to Add Remodeling to Your Mortgage
- How to Determine Your Home's Value for a Refinance
- How to Unlock Your Home Equity
- How to Match Long-Term Capital Gains Vs. Short-Term Capital Losses
- How to Refinance My Mortgage With a Different Bank
- Can I Refinance if My Home's Value Has Decreased?
- Can You Apply for a Refinance & Home Equity Loan at the Same Time?