Accessing Your Home Equity

by Lauren Caggiano

Did you know you can use your home equity to your advantage? There are a few ways you can borrow against the money you’ve invested in your property. Although often categorized together under the umbrella of home equity, these loans and lines of credit have important distinctions you should keep in mind when evaluating options.

DEFINING EQUITY

First, let’s explore the definition of home equity. In simple terms, it’s the difference between your home's market value and your loan balance. it. For example, a home that's worth $200,000 and has a $150,000 mortgage balance has $50,000 in equity. So, unlike renting an apartment, you are actually building equity with every mortgage payment. That’s why home ownership is such an attraction option for people looking to make an investment in their future.

Equity is a factor that should not be discounted. The more equity you have, the more financing options may be available to you. Your equity helps your lender determine your loan-to-value ratio layer (or LTV), which is one of the factors taking into consideration when evaluating your application. A professional appraisal determines your loan-to-value ratio.

USING EQUITY TO YOUR ADVANTAGE

There are several ways to tap into the power of your home equity. Need access to some serious cash to pay off a high-interest credit card, for example? Or maybe you have some mounting educational or medical expenses you want to address. Dreaming of a kitchen remodel? These are all typical scenarios in which you can borrow against your equity.

CASH-OUT REFINANCE

The specifics will vary according to the loan type. An option like a cash-out refinance is attractive to homeowners looking to cover expenses likes those mentioned above. A home equity loan is a separate loan on top of your first mortgage. You'll receive a check at closing and are free to use the funds as you see fit. And unlike a personal loan or other products, you’ll benefit from the safety and security of a fixed rate mortgage.

Speaking of interest, a cash-out refinance can be a means to save significantly. For example, you can consolidate high-interest debt obligations like credit cards into a fixed mortgage payment. You may also get the benefit of deducting these interest payments from your taxes, while credit card debt is not tax deductible.

Qualifying borrowers can finance up to 80% of their home's appraised value. The difference between the new loan amount and the borrower's existing mortgage is paid to the borrower at closing. Cash-out refinances are available in different terms. It’s important to do your homework to understand the specifics and what they mean for you.

Ruoff Tax Benefits

CALL IN THE EXPERTS

There’s no need to feel left in the dark about your options. For added peace of mind, talk to a real estate agent about what’s going on in your area. Is it a buyer’s or seller’s market? Are prices rising or falling? He or she can advise you about the conditions and whether they work to your advantage.

You can also find a subject-matter expert in the form of a Loan Officer. He or she can guide you through the process. Find out what type of interest rates you might qualify for if you choose to finance another purchase. If you’re considering a refinance, ask about your options with those products, too.

In short, there is no universal “right” or “wrong” time to sell or refinance. It’s just best to do your homework so you can make an educated decision. The best decision is one that you feel comfortable with and fits in with your lifestyle.

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