Archive for October 18th, 2018

Is Your Home Your Piggy Bank?

October 18, 2018

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. 

 

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