Using Home Equity: If These Walls Could Talk

Home values and ownership are at record highs in America. Even as the national market slows a bit, these values allow increasingly more options for using home equity to consolidate and eliminate more expensive debt, such as credit cards.

Home equity loans, second mortgages, and home-based lines of credit will be discussed later. What you must first decide is simply if and when it is smart to take money from your home’s value, or to cash-out refinancing.

Why do you want the money? If you intend to pay for college, create a retirement account or take out the patent you’ve been working towards, great. If you intend to just take a vacation, not so great. Be careful that you are not just hiding short-term debt (typically credit cards) in a long-term payment, albeit with lower interest. In this case, it would be better to take the cash and pay-off those short-term debts. Have a detailed budget and stick to it.

Not so long ago, conventional wisdom advised one to pay off home debt as quickly as possible. Now, however, the facts of life have changed radically, and the conventional wisdom no longer holds. In fact, it actually is very possible to have too much equity tied up in your house. One of the very best reasons to take cash out of your home is so that you can put it right back in again. Add square footage, landscape, etc.

About one-third of all homes in the US do not have mortgages. If you are in this position, there are many creative options that will enable you to get cash from your home. Reverse mortgages, inter-vivo transfers, or even sales while keeping your life tenancy are alternatives available to you.

No matter what your reason for wanting the cash, you must weigh your options. On the one hand, closing costs generally are higher for cash-out than for lines of credit, but on the other hand your interest rate should be lower because your equity is being used to keep the lender’s risk down. Cash-out also may cost you more if you try to borrow more than 80% of your home’s equity. In this case, you will need to pay private mortgage insurance (PMI), which typically runs up to $100 per month.

The internet is a great source for shopping around, as rates tend to be almost 0.25% lower than brick and mortar offers. Additionally, if you have time on your side, you should wait until interest rates drop or have not been raised for at least two consecutive quarters. If you are not able to wait, and feel you need cash-out to save your home, then fight for low-fee loans of about $2500. Some lenders ratchet loan fees up as interest rates go up, but you should be able to find a lender who wants your business, your way.