Cashing-in Home Equity

If you want extra money for making improvements to your house, intended for college funds, or other expenses, cashing in home equity is an appealing option. Generally speaking, you’ll get a better interest rate than if you took out a bank loan for such expenses, plus oftentimes you can cash in part of your own home’s equity without increasing your monthly expenses.

There are a number of ways that you should cash in your home’s equity, every with its positives and negatives:

Home Equity Conversion Mortgages:

For those over age 62, a Home Equity Conversion Mortgage (HECM) may be the best way for cashing in home equity. Home Equity Conversion Mortgage loans are commonly called “reverse mortgages, ” because the amount of equity in the home lowers rather than increases over the length of the mortgage.

Reverse mortgages are best suited for individuals who have considerable equity in their homes, but who do not have substantial cash property. There are a number of purposes for which change mortgages can be used, including making house improvements or simply supplementing Social Security benefits or other income.

Those who qualify for a reverse mortgage can pick to receive monthly payments to augment their income, or borrow a lump sum for home improvements, or establish a line of credit.

Reverse mortgages are available through commercial lenders, and are also available through a program through the U. S. Department of Casing and Urban Development (HUD)

Reverse mortgages have restrictions on who are able to qualify, the purposes for which the particular funds can be used, the amount of funds that can be borrowed, and how long the term from the mortgage will be.

FHA loans:

If you’re seeking to cash in part of your home’s equity for home remodeling, you should consider home improvement loan products backed by the Federal Housing Management (FHA).

FHA home improvement loans are usually issued by FHA-approved commercial loan companies. Because the loans are insured by FHA, interest rates are often lower than rates offered by other lenders.

An additional benefit with FHA home improvement loans is the fact that they’re often available to those in whose incomes or financial situations preclude them from getting a loan through private lenders.

FHA home improvement loans carry restrictions on the amount of money borrowed, the types of home improvements the loans can be used for, on how long the term of the loan can be, and borrower eligibility.

Mortgage Refinancing:

If you’re taking into consideration cashing in home equity, and interest rates are low, refinancing your mortgage may be a good option. If you can reduce the interest rate on your mortgage by one or two percent points, you’ll save a lot of money over the term of your mortgage. The amount a person save by refinancing could simply exceed the amount that you’re taking out in cash from the refinance.

Refinancing whenever you reduce your interest rate by less than one particular percentage point, though, makes small sense. The cost of the refinancing may outweigh the savings gained simply by such a small rate decrease.

One disadvantage to refinancing your mortgage is that you’re essentially starting over. You’ll be offered the same fixed rate or adjustable rate packages, and you will pay the same types of closing expenses.

You’ll also be starting over with all the amount of your payment that is placed on your principal balance. With each monthly mortgage payment you make, the amount of that payment going to curiosity decreases, and the amount applied to your own principal balance increases. When you refinance a mortgage, you start all over again with almost all of your monthly payment being applied to interest, and little being applied to principal.

Don’t use refinancing to cash in home equity unless you can reduce your rate of interest significantly. And, if you do refinance, think about doing a shorter term mortgage so that you will reduce the principal balance more quickly.

Home equity loan:

Rather than refinancing for cashing-in home equity, you might want to consider a home equity loan. A home equity mortgage usually has lower closing expenses. What’s more, you won’t go back to having most of your monthly mortgage payment getting consumed by interest.

A home collateral loan is an entirely separate loan from your mortgage. Home equity loan interest rates are usually higher than for mortgage loans, and the loans have shorter terms.

Home equity loans are best useful for specific purposes, such as home improvements or other purposes for which you know the amount of cash you need.

Line of credit:

If you don’t need a lump sum from cashing in your home’s living room equity, you might consider a home collateral line of credit.

A home equity line of credit allows you to determine how much money you’re going to lend, and when you’re going to borrow it. Many people simply like having a line of credit available to them in case of emergencies.

Lines of credit often have reduced interest rates than you would get through re-financing your mortgage. However , the introductory rates on lines of credit are often “teaser rates, ” just as you find with credit cards. While the interest rates on house equity lines of credit are lower than credit card rates, the rates on credit lines can rise or fall.

Lines of credit are expanded for a fixed period of time. After that time period, the lender may or may not invigorate your line of credit, or may replenish it at a different interest rate.
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While it’s up to you to determine whether or not you need to renew your line of credit, your lender may require you to pay any excellent balance in full if you do not renew.

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