With the recent appreciation in home values in our area, it’s likely your home equity has risen to a point where you’re living inside a literal nest egg. Accessing that equity to finance some of the other expenses in your life could be a smart financial move, given the current level of interest rates.
Be at Home With Your Loan: Borrowing Options
One option homeowners have for accessing the savings they’ve accumulated in their home is to refinance with a cash-out mortgage. This involves replacing your current mortgage with one that has a higher outstanding balance. It’s typically more beneficial when interest rates are below the rate of your existing mortgage.
When interest rates are rising, as they are expected to do, using a home equity loan is often more cost-effective than refinancing. Home equity loans are secured by residential real estate, which is typically your largest asset and tends to appreciate over time. So, they often have more attractive terms than unsecured personal loans or those secured by another asset, such as a car.
Home equity loans come in two “flavors”: fixed-rate home equity loans and home equity lines of credit (HELOCs). Here’s what you need to know about each type.
Fixed-rate home equity loans are like having second mortgages. When you borrow, you receive a lump sum and begin repaying the loan immediately, with fixed monthly payments of principal and interest. The loans have a set maturity and are closed after you repay them.
As mentioned above, when rates are rising, home equity loans are helpful in minimizing borrowing costs. For instance, customers who don’t qualify for the best terms at auto dealerships or who buy used cars on a person-to-person basis may find using a home equity loan to buy a car could lower their cost of borrowing.
HELOCs are also secured by your home equity, but they offer greater flexibility. This is why many homeowners prefer them to fixed-rate home equity loans. They work like credit cards in that you only receive a bill when you have an outstanding balance. You can also borrow, repay and borrow again. When you borrow against a HELOC, only the interest on your current balance is due each month for a number of years before principal payments are expected. This enables you to decide how much you want to repay on the principal amount and when to do it.
Prior to retiring, many older homeowners will open a HELOC so they have access to emergency funds for unexpected repairs and medical expenses. There are no restrictions for how the money may be used. However, the interest rate charged on outstanding balances will fluctuate. At Old Second, HELOCs adjust with the U.S. Prime Rate (plus a margin). As interest rates go up or down, so will the interest due each month.
Is It the Right Thing to Do?
Building home equity creates options as you move through your financial life. In addition to the wealth you have in individual savings and investment and retirement accounts, it makes sense to manage the money you accumulate in your home as well. Whether it helps you afford college expenses, pay for a wedding, prepare your current home for sale or is a source of funds for your new home’s down payment, borrowing against your home equity can be a smart financial move. However, before taking out any loan, make sure you know your options and the terms and costs associated with each one. You can check our current rates and incentives here.
The Next Move Is Yours
To access a collection of home equity calculators that will help you understand how borrowing against your home would affect your budget, click here or contact us about your home equity loan options at 630-466-4843 (email@example.com). We can’t wait to talk to you about what we can do for you today.
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Source: TransUnion HELOC Study