A recent study shows that for the first time ever, accessible (or “tappable,” the term used by the study) US home owner equity has exceeded $6 trillion. The number of home owners with equity that they can access has reached about 44 million. In the first half of 2018, this tappable home equity increased by about $636 billion.
Ultimately this means that many Americans can utilize their home equity to fund home renovation projects, cover education costs, consolidate higher-interest debt, or fund other household needs. Americans typically access their home equity in one of two ways, a home equity line of credit (HELOC) or doing a cash out refinance on their entire mortgage. Here are some costs and benefits of each option:
Cash Out Refinance:
- Interest rate is typically fixed.
- Fully amortizing – some of each monthly payment is principal.
- Pays off existing mortgage so borrower starts with a new loan term and interest rate.
HELOC:
- Variable interest rate.
- Interest only payments – balloon due at end of loan term, often 10 years
- Lower closing costs than a cash out refinance.
- Does not change your current mortgage interest rate or amortization term.
So which option is best you ask? Well, that depends considerably on the home owner’s circumstances. As a mortgage lender, here are some questions I think a home owner should ask him / herself to help determine which option is right:
- Do I want a fixed payment or can I live with changing interest rates and payments?
- Am I disciplined enough to proactively pay down my loan quickly, or will I only make minimum payments?
- How much do I need? $100,000 for a home renovation or $10,000 for a home repair?
- Why do I need to access my home’s equity? Is the reason really worth tapping my equity?
Answers to these questions form the basis for a home owner’s decision. In the next post, I will opine on my preferred options based on these questions, and give a recent client scenario.
Do you have a friend considering a renovation or needing funds for a child’s education in the next 3 months? Please refer them to me. I will ask them these questions and coach them to make the best decision for their own unique circumstances.
