Using your home to make big moves through all life events
When you buy your home, you’re putting roots down, as the common saying goes. You’re putting a lot of your time, energy and financial wherewithal into one place. So, even though you’re feeling that you’ve put down roots, you are also giving yourself the ability to make big moves in the years ahead.
Whether it’s an exciting milestone like sending your child off to college, or something unfortunate has occurred, major life events carry a spectrum of emotions as well as a host of financial implications. Your house and mortgage can work for you as you navigate these life changes. And no matter what the financial climate, you could have options.
How home equity can give you financial flexibility
As you pay down your mortgage over the years, you’re steadily increase your portion of ownership in the property. Now of course you own the property, but your lender also owns a stake in it in the form of the mortgage. The amount you own gradually increases as you pay off the remaining balance on your mortgage. This is known as building equity and offers one of the strongest financial benefits of investing in real estate.
Any rise in the value of your property also impacts your share of equity. Unlike other large assets, property value tends to steadily increase after a purchase. Building home equity has become one of the most common methods for establishing wealth and ensuring a financially secure future. You can leverage that wealth into other purchases or investments. Home renovations, university tuition and additional lines of credit can all be financed by tapping that equity into an additional loan from a lender.
Let’s talk about the different ways that you can tap into equity.
A home equity line of credit (HELOC)
HELOCs work similarly to a credit card. You pull from your home equity and are given a line of credit available for a set timeframe (typically 10 years). Options include interest-only draw periods or draw periods with both interest and principal.
Unlike a credit card, however, HELOCs tend to have an interest rate around 2/3 lower than most cards.* And you can get a HELOC with a combined loan-to-value (CLTV) ratio as high as 85% of your equity in the home. You may be able to qualify for as much as $400,000 line of credit, depending on your eligibility qualifications.
Our HELOC is specifically designed to be quick and easy, funding within 5 to 10 days.** It’s also 100% digital from application to closing, with the application taking only about 5 to 10 minutes to complete.*** It’s structured as a fixed-rate loan with term options of 5, 10, 15 or 30 years.
In addition, you can take money from the line of credit for a draw period of 2 to 5 years, depending on the term selected. Best of all, it requires no money upfront from the customer (any fees are included in the loan amount), and funding comes in as fast as just five days.
A home equity loan
Also known as a second mortgage, home equity loans provide a useful option for homeowners looking to finance large expenses. With a home equity loan, you’ll receive one-lump sum to be repaid over a fixed term at a fixed interest rate.
A cash-out-refi
Essentially, you’ll be taking the equity you’ve built up in your home and turning it into money in your bank account. Cash-out refinancing offers a mortgage refinancing option that trades in your old mortgage for a new home loan that happens to have a larger total loan amount. The difference between what you owe on your old loan and the amount of the new loan is paid out to you in one lump-sum payment.****
Like other refinancing structures, a well-timed cash-out refinance approach could result in a reduced interest rate, lowering the amount you’ll be required to pay each month.
You’ll want to make sure you have enough equity built up so that your cash-out-refi won’t increase your loan-to-value (LTV) ratio to over 80%. When your ratio exceeds this amount, you’ll need to purchase mortgage insurance.
When to tap your home equity
Since tapping into your home equity is a major financial obligation — you’re using your home as collateral, after all. So, you want to be absolutely certain that you’re ready to take on the responsibility. In the right circumstances, though, these home equity options give you more breathing room to pay for any cost that might come up or give you the financial flexibility to reach your goals.
Here are some common uses for home equity funds.
If your home needs an upgrade
On the one hand, every home chef dreams of cooking in their own state-of-the-art kitchen and every couple dreams of two sinks in the primary bathroom. On the other hand, something like a leaky roof can be a costly nightmare, and you can’t put off making those repairs. No matter if you’re looking to add some luxury, or make some necessary repairs, it’ll be a hefty price tag.
Using your home’s equity to cover those costs means you’re essentially taking the money you’ve already invested in your house and putting it back into your home. That makes home renovations a reinvestment in your home.
If you have high-interest debt obligations
Getting a handle on high-interest debt can be tough. It might feel like you can never get ahead with the high-interest payments that can come with credit cards and payday loans. One of the advantages of a HELOC or cash-out refinance is an interest rate that’s typically lower than credit cards. They can be a great vehicle for consolidating debt. You’ll clear the books on your high-interest accounts, giving yourself more financial flexibility (not to mention peace of mind).
If your college savings account is growing, but not as fast as tuition
Scholarships have been earned, financial aid has been submitted and that savings account you started when your child was born still isn’t quite covering the difference. Now that room-and-board consists of a dorm room fit for royalty, equipped with the amenities of a hotel, college price tags are at an all-time high. Borrowing from your home equity could help you out.
If you have something to celebrate coming up
Special events like weddings can get pretty pricey, and taking on high-interest debt will only make them more expensive in the long run. If you don't have the funds on hand to cover large-ticket items, your home equity can help. The lower rates on these home equity products give you one less thing to worry about so you can enjoy these once-in-a-lifetime events.
If you’re dividing the assets in a divorce
Divorce can be complicated on so many levels. Your mortgage doesn’t have to be. You have options whether you’re staying or selling. If you decide one of you wants to stay you can refinance your joint mortgage. For example, if you refinance the mortgage into your own name, you’ll factor in only your income and credit score, then cash out a portion of your equity to buy out and pay your spouse his or her share.
If you’ve just inherited property
Your first decision will be whether you’re keeping the property or selling. Either way, when a property is left to an heir (or heirs) the property goes into an estate which is then distributed out after paying any withstanding debts on it. If you want to keep the property and you’re the sole beneficiary, you can refinance into a new mortgage and acquire both the title and estate. If the estate has been left to multiple heirs, you’ll have the option to refinance and disperse the proceeds accordingly so that each heir recoups the value of their share.
If you’re only a few years away from retirement (or so you hope!)
As you fine-tune your 401(k) and financial plan, you’ll want to consider what’s likely your largest asset—your home. Whether you’re looking into downsizing, buying a second home or refinancing your current mortgage, you have options that could leave you with a lower interest rate or help maximize your tax savings.†
One option that’s only available to older homeowners is a home equity conversion mortgage, or HECM. This is a type of reverse mortgage. Instead of you paying a mortgage, this innovative product pays you, offering a fresh approach to managing your finances. You'll receive regular payments, establish lines of credit, or even obtain a substantial lump sum, all from the equity you built in your home.
The mortgage application process is the same for both retirees and working adults, the difference being retirees will often need to set up an income stream or use their assets to demonstrate their ability to repay. This can be done by setting up periodic payments, which verify access to necessary funds. Assets can also be taken into consideration to satisfy an insufficient income.
Work with a home finance expert
Consider all your options and speak with a licensed loan officer to ensure you’re making the most of your home and your mortgage.
Our digital application process offers one of the quickest turnaround times you’ll find for HELOCs and a cash-out refi. You may be approved for a line of credit within minutes and your funds could be deposited into your bank account within 5-10 days.**** There’s no need to delay making a big move if you have the home equity available to cover that cost.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply.
Savings, if any, vary based on the consumer’s credit profile, interest rate availability, and other factors. Contact Rate for current rates. Restrictions apply.
* Source: Average credit card interest rate is 27.65% (Forbes) vs. our HELOC starts at 8.35% (subject to change) – which is 70% lower.
** Approval may be granted in five minutes but may be subject to verification of income and employment. Five business day funding timeline assumes closing the loan with our remote online notary. Funding timelines may be longer for loans secured by properties located in counties that do not permit recording of e-signatures or that otherwise require an in-person closing. In addition, funding timelines may be longer if we cannot readily verify that your property is in at least average condition with no adverse external factors with a property condition report and may need to order a desktop appraisal to confirm the value of your property.
*** During Rate's Digital HELOC process, the borrower and/or Rate may need to communicate or facilitate the origination and closing of the borrower’s HELOC using non-digital methods, including but not limited to telephone or letter. There may be instances, due to borrower preference, applicable law, or other reasons, in which HELOC closing must occur in person. Additionally, Rate makes no representations and cannot guarantee that borrower’s HELOC will be serviced by a servicer that maintains an entirely digital process.
**** Using funds from a Cash-out Refinance to consolidate debt may result in the debt taking longer to pay off as it will be combined with borrower’s mortgage principle amount and will be paid off over the full loan term. Contact Rate for more information.
† Rate does not provide tax advice. The consumer should always consult a tax advisor for information regarding the deductibility of interest and other charges in their particular situation.