Many homeowners have thousands of dollars of equity built up in their homes, and that continues to grow each year that you live in the home and continue to pay down the mortgage balance (with hopefully values continuing to increase). That equity is accessible once the house is sold, however, with a second mortgage in a home equity loan or home equity line of credit (HELOC) can make those funds available now, avoiding the overwhelming approval process and closing costs of a cash-out refinance.
While these two loan options may seem similar on the surface, there are a few subtle differences that are worth factoring into your decision in which to proceed with. Home Equity Wiz provides detailed specifics on the differences and subtle nuances of these points of liquidity, and you can read on below for a summary of the two.
First, let’s figure out the equity you can borrow
There may be a fine line between what you are looking to borrow vs. what you’re approved for. When it comes figuring out the equity that you have built up that you can use to borrow against your home, first take the remaining mortgage balance and divide by the estimated home value (the loan process will provide an appraisal for an exact amount).
Keeping the 80% rule in mind as the maximum you can borrow, you can see roughly the line you will be approved for. From there, you can decide how that fits with your financial needs, whether it means completing a home renovation project, paying for a wedding, or getting out of debt.
A traditional mortgage will have more of a drawn-out closing process with inflated fees, but no matter which equity loan you choose, there will still be credit and income qualifications in order to secure your requested line amount, not to mention the interest rate.
Take a look at a standard home equity loan
This option is more in line with any other loan, where you are approved for a certain amount, and come to agreement on the interest rate and terms. This may be a great option to gain accessible cash at a rate lower than a typical credit card, so you’re able to fund your project and spread the payments out over the next fifteen years or so. While a traditional mortgage loan closing costs may add up to the thousands, you can expect an equity loan to be limited to only an application and appraisal fee.
Maybe a home equity line of credit (HELOC) right for you?
Keeping all of the same equity calculations and qualifications in line with a standard equity loan, you can also look to an equity line of credit. This works more like a credit card where you will be approved for a line amount to borrow against, so you have it when you need it, only paying back on what you borrow.
This is a great feature when you may not know the exact amount to borrow. The kicker is though, the interest rate can fluctuate as it’s variable, so your payment will adjust as the rate increases or decreases. There will likely be a maximum threshold, but the difference between the high and low could still mean costing you hundreds of dollars a month.