Ways to Get Cash From the Equity In Your Home
Your Home Might Be an Overlooked Source of Cash
Most homeowners realize that their homes have a certain value. They usually have a rough idea of how much their home is worth, and what they coud probably (or hopefully) expect to get if they sold it.
However, many homeowners often fail to realize that they can tap into that value without selling. There are ways to get cash for the equity in your home while still maintaining ownership. Here are a few of those options.
Home Equity Loan or Line of Credit
One way in which you can unlock the equity in your home is with a Home Equity Loan (HEL) or a Home Equity Line of Credit (HELOC).
Both of these essentially act like second mortgages, but there are slight differences. With a HEL, you get a get a specific amount of money in a lump sum, and you pay it back over a certain period of time, just like your mortgage. (The time period may vary, and can be up to 30 years.) On the other hand, a HELOC behaves more like a traditional line of credit, such as a credit card: you can withdraw funds as you need them - up to a certain amount - and then you pay it back (usually via minimum payments that are due each month). But, just like most credit cards, you can pay off the balance due on the HELOC at any time.
HELs and HELOCs are attractive options because they typically have lower interest rates than other forms of credit. Moreover, the interest you pay is usually tax-deductible, which is not the case with credit cards. All in all, a HEL or HELOC could be a good choice for getting cash out of your home.
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Typically, homeowners will refinance their mortgage in order to get a better interest rate. For instance, if a homeowner has a current rate of 6% and the rate drops to 4.5%, if may be worthwhile to consider refinancing, because the lower interest rate will translate into a lower monthly mortgage.
With cash-out refinancing, you are refinancing your home loan but for an amount that is more than what you currentlu owe. By way of example, let's assume that you currently owe $100,000 on a house that is worth $175,000. The amount of equity that you have in your home is $75,000. When you refinance, you could do so for a larger amount than what you owe - say, $150,000. That means that - not accounting for fees, closing costs, and the like - you walk away from the deal with $50,000 in your pocket. You can use the money for whatever you want: paying bills, buying a car, starting a business, taking a vacation, what have you.
The down side is that you'll only have $25,000 in equity remaining in your home, but that's part of the trade-off. (The other part is that you'll have a higher interest rate than you if you hadn't taken any cash out.)
A reverse mortgage is exactly what the name implies. Rather than you making monthly mortgage payments to the bank or lender, they make payments to you. In other words, the homeowner receives the value of their home equity in regular cash payments. Even better, this money doesn't have to be paid back until the homeowner either dies, sells the property or moves.
Unfortunately, this is a deal that is only available to homeowners age 62 or older. Basically, it was designed to help senior citizens who were house-rich but cash-poor. (In other worlds, those seniors who might have lots of equity in their homes, but not a lot of savings or income.) Moreover, reverse mortgages are often criticized for their high fees, but there is a lower-cost version - the Home Equity Conversion Mortgage (HECM) - that is sponsored by the Department of Housing and Urban Development.
All in all, reverse mortages can be a great way for eligible seniours to cash in on their home equity.
Summary of Ways to Get cash From Your Home
In retrospect, there are numerous ways to get cash out of the equity in your home. Needless to say, this can provide some well-deserved relief if money has become a bit tight. Moreover, there are other ways to get money out of your home that have not been mentioned here.
Regardless, it's best to remember that there are both pros and cons to everything suggested here. Just remain aware of those and you are unlikely to have any issues.
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