With record-high housing prices and rates on the rise, many homeowners are wondering how do I access the equity in my home? Let’s take a look at your options.
CASH DRAW: HOW DO I ACCESS EQUITY IN MY HOME?
Think of equity as the magical stuff your home acquires over time, kind of like dust bunnies but made out of cash (well, potential cash really). House prices are up and if you’ve been paying a mortgage for a while, you may be wondering how you can access the equity in your home.
If you’re looking to upgrade your home, need cash to start a business, or maybe need to fund a college education, it’s hard to ignore the money already sitting in your most valuable investment—your home. Let’s take a look at what equity is, how it accumulates, and some of the ways you can put those cash bunnies to work for you.
WHAT IS EQUITY?
Equity is the value of your interest in your home. It’s the current market value of your house, less the outstanding balance on your mortgage or any other loan secured against the property. Basically, it’s the part of your home’s value that belongs to you.
HOW DO YOU BUILD IT?
Your equity rises as you pay down your mortgage over time. Each payment increases your stake in your home. You also earn more equity per mortgage payment as you pay down your loan because more of your money is going to pay the principal, rather than the compounded interest your lender tacks on top of it.
Rising property prices also increase your equity, because your home’s value goes up while your mortgage amount declines, and that increase belongs to you. While falling prices can also eat away at your equity, home prices are more likely to rise over time. Currently, record house prices mean many homeowners are sitting pretty.
HOW CAN YOU USE IT?
Equity is the money you would pocket if you were able to sell your house today. Most likely, this pool of potential cash is the single biggest asset you own. While it’s not actual money sitting in an account, it’s a valuable resource that you can tap into or borrow against, and which gives you significant bargaining power with lenders.
Best of all, there are several ways to realize the value of your equity without physically selling your home.
Cash-out refinancing is essentially selling your home and buying it again by reappraising the value of your property and taking out a new mortgage at the new price. The difference between the two mortgage amounts, plus the money you’ve already paid down on your old mortgage, is then paid out to you.
This is a great way to fund improvements to your house as you are effectively reinvesting equity. Other advantages include:
You receive a single no-strings lump sum payment
You may still be able to lock in a lower interest rate despite recent rate hikes
However, aside from the rising cost of borrowing, a refinance still means you have liquidated your equity. In addition:
You lose out on the growth potential of your old equity
You have to begin paying down your new mortgage from scratch
You’re more exposed to a fall in house prices
Home Equity Loans
A home equity loan allows you to borrow against your equity while leaving it in place. Often called a second mortgage, this is usually a fixed-rate loan based on the value of a portion of your equity and secured against your home. Terms are similar to those on your mortgage.
Home equity loans are popular because:
You receive a no-strings lump sum payment
You have predictable payments
You continue to build equity in your home
On the other hand, bear in mind that you’re effectively piggy-backing a loan onto another loan. That means:
You may pay a higher interest rate than on your mortgage
Both loan and mortgage could go underwater if prices fall
If you sell your house you’ll need to pay off your loan
Home Equity Lines of Credit
Another form of second mortgage is a home equity line of credit or HELOC. Rather than borrowing a lump sum, this is revolving credit that you can tap as needed for a set period after which the full amount must be paid down. Your borrowing limit is based on the equity you hold and is secured against your home.
HELOCs allow you to continue to build equity while offering:
Flexible, convenient credit on tap at low rates
High credits limits and long repayment terms
Interest-only repayments during the “draw” period
HELOCs are a good way to consolidate debt or pay for ongoing home improvements. However, be aware that:
Most lenders require you to borrow at least $10,000
Many borrowers receive a “payment shock” when the “draw” period ends
You’ll pay more if interest rates rise over the life of the loan
IT’S UP TO YOU
How you choose to access your equity depends on your individual needs. Whatever you choose, bear in mind that:
You’ll normally need to pay closing costs, appraisals, and other loan fees
When you borrow against your house, you risk losing it if you can’t make payments
On the plus side, lump-sum payouts on home equity loans and refinances, as well as interest on line of credit payments, are often tax-deductible if used for home improvements or paying for tuition.
GET THE MONEY YOU NEED WHEN YOU NEED IT
When looking at ways to tap your equity, it helps to partner with someone who knows you and your financial circumstances. At Fibre Federal Credit Union we offer our members a range of options to help them get the most out of the money that’s already in their house.
Talk to us about our fixed-rate limited draw line of credit or other innovative home loan products. We also offer: