Some Mortgages that Let You Tap into Your Home Equity

For the average American, a home is perhaps the most expensive investment of a lifetime. It’s an invaluable asset that epitomizes the American dream.

However, many Americans are also uninformed about the potentials of investing in a home. What they do not know is that within their home asset is another asset that can be a very beneficial financial tool to those who know how to maximize it.

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Enter home equity

A home equity, simply put, is the extent of ownership you have on the home.

Let’s say you took out a mortgage for a home that is worth $500,000 on the market. If you are able to pay down the 20 percent conventional down payment requirement which is $100,000, that 20 percent becomes your home equity.

In a more complicated sense, home equity can be represented by the equation:

Assets – Liabilities = Equity

Basically, equity represents the part of the home that is yours. As you start making your mortgage payments, you are also increasing your home equity. This equity is yours. That means you can take it out via some very feasible means for your own financial benefits.

So what are the ways to extract my home equity?

Various loan programs cater to the specific purpose of letting the borrower tap into their equity reserves. Let’s get to know these options:

a.) Home Equity Loans. A home equity loan is a secured loan made against your home. It lets you borrow the stored value of your home for any purposes you see fit. A home equity loan is often considered a second mortgage as it also places a second lien on your home.The loan is disbursed via a lump sum and is repaid via fixed interest and monthly payments over a repayment period that is typically shorter than your mortgage amortization period.

b.) HELOC or Home Equity Line of Credit. Just like a regular credit card, a HELOC allows you to tap into your equity in parts. You can borrow multiple times until the maximum loan amount is used. You only pay interest on the amount you borrowed. Unlike a regular home equity loan, HELOC has both variable and fixed-rate options.

c.) Cash-out Refinancing. If you refinance into a new loan, borrowing a loan amount that is higher than your original mortgage, you can take out the difference in cash and use it for your own purposes. A cash-out is favorable when your home has seen considerable appreciation, or when interest rates are low and you’ve gained significant equity on your property.

d.) Reverse Mortgage. A mortgage product specifically designed for senior homeowners aged 62 and above, a reverse mortgage allows the homeowner to tap into their equity as either i) cash; ii) line of credit; or iii) a combination of both. A reverse mortgage targets those homeowners who already fully own their homes or those who are near their payoff period. The loan is only repaid once the borrower decides to move, sell the home, or passes away.

Tapping into your home equity is a choice that you need to carefully consider. Ask yourself: would you be able to pay for the loan, on top of your existing credit obligations? Would you risk losing your equity when you know the market is not stable? What are your future mortgage plans?

There’s no one-size-fits-all strategy to home equity borrowing. Examine your need, your options, and your financial capacity first and find the best home equity loan choice that suits you best.

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