How to Get Equity from Your Home
How to Access Equity in Your Home
Your home is probably your largest asset, and tapping the equity can help you achieve other financial goals, such as paying for college or consolidating loans. Fortunately, you have many options: home equity loan, cash-out refinance, home equity line of credit, and reverse mortgage. Analyze your current situation to find the right option and then shop around for the best deal.
Analyzing Your Options
Calculate the equity in your home.Equity is the amount of value in your home after you subtract the mortgage from the home’s value. For example, your home might be worth 0,000 and your mortgage might be 0,000. This means you have 0,000 in home equity.
- You can estimate the value of your home by looking at how much comparable properties have sold for in your area.
- Most lenders won’t let you borrow all of the equity. Instead, you can typically get 85% of your home’s value minus the mortgage. For example, if your home is worth 0,000 with a 0,000 mortgage, you can borrow 5,000 (0,000 x 85% = 5,000 minus 0,000).
- However, some lenders will let you borrow up to 100% of your equity.
Identify your options for accessing equity.There are several ways you can access equity in your home. Consider the following:
- Home equity loan (also called a second mortgage). This is a second mortgage on your home. With this loan, you now have two mortgages on the house.
- Cash-out refinance (cash-out “refi”). You take out a new mortgage which is larger than your current one. With the proceeds, you pay off your initial mortgage and pocket the money left over. For example, your mortgage might be 0,000 and your refi might be 0,000. You’ll have a new mortgage for 0,000 and ,000 in cash.
- Home equity line of credit (HELOC). This is like a credit card. You are approved for a credit line and can draw on it when you need it. Your monthly payments will be based on the interest rate and how much you have drawn. The line of credit will be secured by the equity you have in your home.
- Reverse mortgage. A reverse mortgage allows seniors 62 or older to get money from your home. When you die or move, you or your heirs will need to repay the loan—usually by selling the house.
Consider why you need the money.What you hope to do with the money will influence how you withdraw equity from your home. For example, consider the following:
- If you need a big lump sum, then a home equity loan or cash-out refi is probably your best option. For example, you can use the money to pay for medical care, school tuition, or debt consolidation.
- If you only occasionally need money, then a HELOC is probably best. For example, you might need a line of credit if you are starting a business and want money to cover any shortfalls.
Check whether your interest rate is too high.You might have obtained your mortgage when you had poor credit. As a result, your interest rate might be much higher than what you could qualify for now.Contact a local mortgage professional for a rate quote.
- If your current rate is too high, consider a cash-out refinance. You’ll replace your current mortgage with a mortgage that hopefully has a lower interest rate.
Gather information ahead of time.When it comes time to apply with a lender, you’ll need to present personal and financial information. Collect the following ahead of time:
- Social Security Number so that the lender can pull your credit report.
- Proof of income, such as pay stubs, W-2 form, or tax returns.
- Information about your assets and debts.
Obtaining a Home Equity Loan or Cash-Out Refi
Talk to multiple lenders.You want the best deal that you can get, and you aren’t required to get a loan from your current lender. Stop into banks and credit unions in your area and talk to a loan officer. Credit unions frequently offer better rates than banks, so make sure to stop into a few. You should also talk to mortgage brokers and direct lenders, who may offer better terms than traditional banks and credit unions.
- Discuss interest rates, fees, and penalties for any missed payments. Also discuss the length of the loan. Home equity loans are paid back in monthly installments, usually with a fixed interest rate.
- Ask whether other fees and closing costs can be waived. You might save thousands of dollars this way. For example, a cash-out refi should have closing costs around 3-6% of your loan.
Watch out for predatory lenders.The mortgage market is rife with shady companies looking to take advantage of people. You should avoid doing business with anyone who does the following:
- Pressures you into making a quick decision.
- Encourages you to lie on your application.
- Encourages you to take out more than you can afford.
- Asks you to sign paperwork that hasn’t been completely filled out.
Apply for your loan.Ask the lender for blank copies of your forms and read them thoroughly. Ask questions if you have any. Generally, you can apply in person or online. If you have a lot of questions, you might choose to apply in person.
Compare loans.Compare loans based on interest rate, fees, late penalties, and monthly payments. Once you pick the loan that works the best for you, contact that lender and state you want to go ahead with the loan.
Close on the loan.Read your documents closely and ask questions if you don’t understand anything. Definitely ask questions if the terms of the loan differ from the original offer.They shouldn’t.
- You might want to attend your closing with an attorney, who can advise you about whether to go forward with the loan—especially if there are new terms.
- If you got a cash-out refi, you should receive a check at closing.You’re free to spend this money however you like.
- Before leaving, get copies of all signed documents from the lender.
Applying for a HELOC
Check if you qualify.You can’t have too much debt to qualify for a HELOC. For example, the total amount of your mortgage shouldn’t be more than 28% of your gross monthly income. This includes insurance, taxes, and HELOC payments.
- Also, your total debt payments should be less than 36% of your gross monthly income. Add up other debts, such as student loans, credit cards, car payments, etc.
Shop around.Stop into nearby banks and credit unions and ask about getting a HELOC. You don’t need to get a HELOC from the lender who gave you your mortgage, so shop around.Credit unions generally offer better deals than banks, so make sure to visit a few. Additionally, mortgage brokers and direct lenders may offer even better terms than a credit union.
- Talk to the loan officer and state you want a home equity line of credit. The officer will gather information from you and then tell you their terms.
Compare terms.Avoid signing with the first lender to make an offer. Instead, gather all offers and compare them to find the one that is most favorable. Consider the following criteria:
- Interest rates. Generally, your interest rates will fluctuate.Understand how the interest rate is calculated. Some lenders might offer fixed rates, but this is rare.
- Draw period. This is the window of time when you can draw money on your credit line. Typically, you only pay interest on any amounts withdrawn during this period. It can last from four to six years with many HELOCs.
- Repayment period. After the draw period ends, you need to pay back the principal you borrowed. Repayment periods vary, but can be up to 10 years.
- Fees and closing costs. Understand the entire cost of getting a HELOC. Closing costs can include appraisal fees and attorney’s fees.
- Required withdrawals. Some lenders will require that you draw on your credit line several times each year, whether you want to or not.
Submit your application.The application process will be similar to the application process for your mortgage. You’ll need to provide personal and financial information. Make sure to ask the lending officer any questions that you have.
Obtain approval.Typically, it takes a few weeks to process and review your application. If you’re approved, you should be given a credit card or check book (or both) to use to draw money on your credit line.
Investigating Reverse Mortgages
Check if you qualify for a reverse mortgage.Not everyone can get a reverse mortgage. Before applying, check if you qualify:
- You must be at least 62.
- You must live in the home as your principal residence.
- You must own your home outright or have a small mortgage. You generally must pay off your mortgage balance at closing.
- You must be able to pay your taxes, insurance, and repairs on the home. If you can’t, then your lender might require that you repay the loan.
Meet with a HUD-approved counselor.This is a mandatory requirement. Your counselor will talk with you about what other options you have and explain the consequences of getting a reverse mortgage.You can find a counselor by calling 800-569-4287 or visiting the search page at .
- Counselors generally charge up to 5 for a counseling session, though some will offer counseling for free.
- You’ll need a HECM Counseling Certificate before a lender can give you a reverse mortgage, so definitely attend your counseling session.
Find a reputable lender.You don't want to be scammed, so thoroughly research a lender before contacting them. Check the Better Business Bureau for complaints and contact your state's Attorney General to see if the lender has been sued.
- Also check whether a lender is a member of the National Reverse Mortgage Lenders Association (NRMLA). Members must meet certain ethical and operational standards. You can find a member at .
Complete an application.The application process should be similar to that of applying for a conventional mortgage. The lender needs your financial information so they can evaluate whether you are a good candidate for a reverse mortgage. Provide the following:
- Social Security Number so that the lender can pull your credit history.
- Information on wages, salaries, pensions, and other investment or retirement income.
- Records of expenses, such as insurance, taxes, utilities, and other personal debts.
Wait for approval.The lender will need to analyze your financial information and investigate your home. For example, the lender should perform a title search and look for liens or other problems. Generally, you should hear back within 30 days.
Choose how you will receive your payments.After you’ve been approved, you’ll need to decide how you want to receive payment. You have many options, including the following:
- You can get payment as a line of credit. This lets you limit the amount of interest you pay, since you only pay interest on money drawn on the credit line.
- You can get a “term” option, which is a fixed amount each month for a specific amount of time.
- You can also get a “tenure” option, which pays a fixed amount each month for the entire time that you remain in the home.
- You might also get a lump sum, called a “single disbursement.” Generally, you’ll get less money with this option.
Schedule your closing.Depending on your state, you’ll have a closing with a title agent or an attorney. If you have any other liens on your home (such as a mortgage), you must pay them off before you can receive your payout.
- You should consider hiring your own attorney to attend the closing with you. They can review the paperwork and make sure everything is in order before you sign.
Video: What Is a Home Equity Loan? | Financial Terms
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