Home ownership has a lot of perks: you can make renovations and stylistic changes at your leisure. You don’t have to rely on a landlord to make house repairs, and in the long run it’s a better money investment than renting. On top of all of that, if you own a home you can also be eligible for a couple of different unique sources of cash flow. Most notably the access to home equity loans and cash-out refinancing. Both options are exceptional to have in your financial toolbox, but it’s important to understand the different types of utility that they offer, so that you can ultimately understand which is the right option for you.
What is a Home Equity Loan?
There are two types of home equity loans: traditional and HELOC:
- Traditional - Traditional home equity loans are a type of loan is associated with using your home as equity to access more funds. It is often referred to as a second mortgage. This is another mortgage which is accessible only when the market value of your home exceeds the remaining payments on your first mortgage, which usually takes somewhere between 5 and 10 years. They are given at a fixed interest rate with a fixed agreed upon amount - available and distributed as a lump sum.
This option can be a smart choice (if it is accessible to you) if you have high interest debts that you want to pay off. Interest rates on a second mortgage are both fixed and usually quite a bit lower than interest payments on something like a credit card.
- HELOC - or home equity line of credit is a creditor determined line of credit available to you by using your home as equity. HELOC can be a little bit riskier compared to a conventional lump-sum loan because it has fluctuating interest rates similar to a credit card.
Increased financial uncertainty comes with a lot more flexibility, which is the primary appeal of going HELOC over conventional. A HELOC allows you to draw whatever amount you choose within your approved line of credit. Along with the fluctuating interest HELOCs typically have a higher baseline interest rate. When you’re considering one make sure your finances are as flexible as the interest rate could be.
What is Refinancing?
Refinancing- often referred to as cash-out refinancing is an option that allows you to take out a second loan and thus “refinance” your mortgage. It is a larger loan that can help you pay off your mortgage, with the purpose usually to pay off the remainder of your existing mortgage and pocket the leftover money for other expenses; it is also a good option for avoiding PMI and the additional costs associated with it.
Knowing Which is Right For You
Figuring out which of these makes the most sense for you requires a lot of thought, a good understanding of your own finances, and a little bit of help. If you’re looking to piggyback off of the built-up equity you have in the form of one large loan- possibly to pay off old debts or cover a large expense without taking out a higher interest loan like a student loan- then a traditional home equity loan might be the way to go. If you want to stretch out the life of your mortgage for the purposes of lower monthly payments, or want to get around private mortgage insurance (PMI).
Whether you’re in the game of a home equity loan, or are looking to refinance, with either of these options you’re looking to free up a bit of financial flexibility - and at HRCCU we can help with that. With up to 95% of the appraised value of your home available through our home equity loan program, and cash-out refinance options ranging from 5 years to 30, we have options that are flexible and catered to your unique situation. Just get in touch, and we’ll advise you on the best steps for your financial health moving forward!