Becoming a homeowner is a dream come true for many people. For starters, they can finally have something that they can call their own. It doesn’t matter if they could afford that using their own money or through a mortgage plan that they are going to repay for the next three decades of their life.
Owning a house can mean that a person has achieved stability in their life, whether it is through their financial obligations or with the idea of settling down to start a family. This is something that many people can only dream of, and to able to do this is a feat in itself.
But being financially obligated to meet your dues means that you are tied to your house, which can leave little to no room for anything else. You might think that you have no other option to begin other endeavors that will cost money, but that’s where you are wrong.
You see, every time you make payments for your home or when the property value increases, your equity increases as well. This is the aspect of your home that you truly own, and it is a valuable asset that you can tap when you need some money. You have plenty of options where you can use your home equity, such as those stated below:
Fixed-rate Loans and HELOCs
Home equity loans act as a second mortgage that you place on your home to convert the equity into cash. The loan amount that you can get is based on the difference between your home’s current market value and the mortgage balance that you are due.
If you need immediate funding to finance renovations that can increase your property’s value, as capital to start your business, or to pay off educational and medical debt, then taking out a home equity loan can be a much viable option. This is because it has a lower interest rate compared to conventional loans from banks or private lenders.
There are two kinds of home equity loans: fixed-rate and home equity lines of credit (HELOC). Fixed-rate loans come in one lump sum withdrawal, while HELOCs can provide you with revolving lines of credit. HELOCs act like a credit card that you can tap whenever you need the money, unlike fixed-rate loans that can only be taken once.
When it comes to the repayment period, HELOCs are the more flexible option between the two. The withdrawal period for HELOCs is usually between five and 10 years, while the repayment period is between 10 and 20 years. On the other hand, fixed-rate loans are usually repaid between five and 15 years with an agreed-upon interest rate, hence the name of the loan.
HECM and Non-HECM Loans
When you reach a certain age, specifically 62 and older, you can be entitled to get reverse mortgage loans based on the amount of equity you have in your house. You can turn your home equity into a cash income that comes with no monthly payments, unlike regular mortgages. But since you’re taking money from your equity, your home’s overall value decreases while your debt increases.
This loan is like an advance that you can take out from your home, which you will only have to pay when you move out from your current house or in the unlikely case of your death. When this happens, your lender can take your house’s sales to repay the loan, or your heirs can refinance the loan so that they can keep the house.
There are two types of loans under this category: home equity conversion mortgage (HECM) or non-HECM loans. HECMs are only offered by the federal government, while non-HECM loans can be applied through various lending institutions.
If you need a lot of money to pay off your debt or add to your retirement fund, then it might be better to get a non-HECM loan because it’s more flexible than HECMs. This is because HECMs are insured by the federal government, which means that the maximum loan amount you can get is limited to assure that it can be repaid.
Tapping the wealth hidden beneath your home can be a wise move, but it shouldn’t be taken lightly because your house acts as collateral in all the situations mentioned above. This is why using the home equity to fund personal expenses, or monthly bills is not recommended.
If you’re going to use your home’s equity for whatever financial matters you need to settle, you must be a responsible homeowner and weigh all your options before putting your house at stake. Besides, educating yourself about the pros and cons of your options will never be a waste of your time.