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Refinance Home Equity Loan Into Mortgage
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What Is A Loan To Value Ratio?
Yes, you can use your home equity to invest. Home equity—the positive difference between the value of your home and what you still owe on your mortgage—not only contributes to your overall net worth, but can be used for a variety of financial purposes.
For example, let’s say your home is worth $300,000 today and you owe the mortgage company $180,000 before you pay it off in full. That gives you $120,000 in home equity.
If you want, you can use some of this capital to invest and develop elsewhere. But how to get capital? You have three main options:
One of the most common ways to get equity in your home is through a cash-out refinance. This process involves refinancing your existing mortgage by taking out a new loan for a higher amount than you owe. Your lender will give you the difference, which you can invest elsewhere.
Home Equity Loan Vs. Heloc: What’s The Difference?
In the example above, a cash-out refinance can be used to get up to $60,000 out of your home. You can take out a loan of $240,000 (your current loan balance is $180,000, plus $60,000 in equity) and start making monthly payments on the new loan.
Another option for obtaining equity is a home equity loan, sometimes known as a second mortgage. This type of loan is secured by the equity in your home and is similar to a home equity loan – and it often comes with similar requirements as a home appraisal.
With a home loan, you receive a lump sum payment that is paid monthly. Loan terms are typically 5 to 30 years, and you may be offered a lower interest rate with a home equity loan than with an unsecured personal loan.
Just like with a cash-out loan, you’ll pay closing costs when you take out a home equity loan.
Average Cost Of A Mortgage Refinance: Closing Costs And Interest Charges
Finally, there is the home equity line of credit (HELOC), another type of second mortgage secured by your home. Although this line of credit is open and available for a certain period of time, it is different from a home equity loan or cash-out refinance. This allows you to access funds when you need them.
A HELOC works like a credit card. You will be given a credit limit that you may or may not spend and an interest rate that changes frequently. If you use an existing loan, you will have to pay back the balance and interest; then you can spend again up to your credit limit.
Let’s look at six ways people can use their home equity to invest and why you should do the same.
At some point in your career, you may decide that you could benefit from further education. This could be college or trade school classes, specialized courses, or specific assignments within your discipline.
How To Refinance A Home Equity Loan
You may consider using a home equity loan to pay for this education, which is an investment in your future. However, not all careers benefit from higher education enough to justify the costs. Make sure what is realistic for your business and whether there is enough income to invest.
Before taking out your home equity, you should also consider the rate you can get with a traditional federal student loan. If you finance your education with a federal loan, not only do you have access to potentially lower interest rates, but you also get flexible payment plans if you can’t make your payments on time. Conversely, if you are struggling to pay your home equity loan, you could lose your home to foreclosure.
Whether you want to improve your home to make it ready for sale or simply update your living space, using your home equity to invest in home improvements is a popular decision. Plus, certain improvements can even increase your home’s value over and above the sticker price, helping you build more equity in your property.
However, this can have a downside. It is important for homeowners to research the types of home improvement projects that offer the best returns in their area. Some aren’t worth the expense, especially if you’re making improvements to increase your home’s resale value. This is especially true for highly customized remodeling projects.
What Is Home Equity?
Finally, consider when to invest in home improvements based on how long you plan to stay in the home. If this is your forever home, it doesn’t really matter. If you plan to sell, you can enjoy your efforts (and renovation dollars) before selling the property, especially if your improvements don’t have a high resale value.
If you are looking to invest in your company or grow your existing business, a home equity loan can seem like an easy and convenient option.
According to Tom Hutchens, executive vice president of production at Angel Oak Mortgage Solutions in Atlanta, the difficult process of getting a business loan makes using home equity very attractive.
“Getting a mortgage can be a very simple process. The demand for business loans requires a deeper look at the business itself,” Hutchens says. “With your home, you already have immediate equity there.”
Here’s How To Finance Your Remodel
However, it’s also worth noting that the US Bureau of Labor Statistics reports that only 50% of businesses with employees stay at least five years. For this reason, business owners should have a home equity loan repayment plan even if their business fails.
There are no guarantees in investing in the stock market. However, watching the S&P 500 rise over the past 10 years may encourage some homeowners to use their home equity loan proceeds to invest in the stock market, hoping to earn more than they paid in interest.
“Getting a real estate loan to get your next branch is pretty risky,” says John Mazza, president and CEO of Summerfield Wealth Advisors and a former financial advisor at Southeast Financial Services in Greensboro, N.Y. wins the race with slow and steady markets.”
If you are looking for an investment property, want to start a business, or are interested in buying a second/vacation home, you can use the equity in your home to buy another property.
Things To Know About Equity In The Home
However, real estate investing, and real estate investing in particular, comes with risks. Investors should have a deep understanding of the market they are entering, how to price a property for quick move or rent, and other issues. If you are renovating an investment property, establish strong relationships with the contractors who will do the work and be prepared to support the costs of the property until it is sold or rented.
Your home equity can also be used to invest in your financial stability by working to eliminate existing consumer debt.
This can be considered if you are currently paying off credit card debt, student loan balances, or a personal or car loan with a higher interest rate. Although you’re essentially trading one loan for another, using your home equity can help you get out of debt faster and with lower interest costs than paying off your current plan. You can also improve your credit score in the process.
Just be careful that you don’t get yourself back into debt after cleaning up those leftovers. For example, if overspending is a problem for you, pay off your credit balances and then cut out physical cards so you don’t have to use them.
Home Equity Loan And Heloc Guide
Keep in mind the pros and cons of using your home equity to invest, especially if you’re wondering how to best use the equity in your home.
You can usually get interest rates that are more competitive than consumer credit products. If you need cash and don’t have liquid savings, your options are usually limited to a personal loan, credit card cash advance, or home equity loan. Fortunately, interest rates on a cash-out, home equity loan, or HELOC are generally much lower than other consumer products.
You will find that the underwriting process can be simpler. Compared to business loans and even large personal loans, your home equity is easier to access because you
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