Do you need cash for a huge project and have considerable equity in your home?
Rather than go borrowing with huge interests, there are ways to turn the equity in your home into cash, this way you get the money paid into your bank account and you wouldn’t be expected to make monthly repayments.
Here are a few ways to do this.
Take Out a Reverse Mortgage
A reverse mortgage is a kind of loan that’s secured using the equity you have in your home. This home must be your primary residence and you must be at least 62 years of age to qualify.
The money from a reverse mortgage is tax-free and repayments are not required until the borrower either passes on or sells the home in question.
After taking out a reverse mortgage, the borrower is still expected to take care of property maintenance and any insurance costs on his property.
The money from a reverse mortgage could be paid as a lump sum or as monthly payments and the borrower could spend this cash any way they wish to.
ReverseMortgageReviews.org provides a guide to help you narrow down which reverse mortgage lender is right for you.
Cash-out refinancing is a kind of financial option, where you convert your home’s equity to cash.
People who have made some early repayment of a mortgage loan will typically have considerable equity in their home.
You can renegotiate your mortgage payments, by getting a new mortgage with better outcomes; lower interest rates, and lower monthly costs.
With this option, your house is used as collateral, meaning that you can get a new loan (mortgage) with your house as the security.
Refinancing like this provides you with cash that you can use for bigger expenses, such as college costs, emergency fees, etc.
The lender usually assesses your mortgage’s current terms, credit profile, and balance to clear off the previous loans. Then, they give you a new offer.
Normally, refinancing does not provide you with any cash. You just notice a decrease in monthly mortgage costs.However, in cash-out refinancing, you do get funds — with the option to spend it as you like.
This does decrease your home’s equity. Which increases the risk that the lender has to deal with. As a result of this, the interest rates, closing costs and fees are higher than normal.
Home Equity Line of Credit (HELOC)
HELOC is a kind of loan that you can tap into for a specific time period. It’s like a credit card but for houses.
If you want to draw money but are unsure how much it should be then HELOC is great for you.
The way it works is that you have a specific time called “the draw period” which is 10 years, where you can draw money — at an agreed limit, from your line of credit.
HELOC has lower interest rates than some other types of home loans. And you only must pay interest for money that you withdrew, rather than the approved loan.
You must make minimum monthly payments to continue using HELOC. Usually, these payments are just for the interest rates that have accumulated. The money that you pay cycles back to the line of credit which you can use again.
After the drawing period is over, the repayment period begins which is 10-20 years.
At this point, you’ll have to repay all the debt and you can’t draw any more from the HELOC. Your monthly payments alsostart to increase because of the principal plus interest.
Different factors such as the equity of your house, the debt you have, and the credit score all play a role in your approval for HELOC.
The equity should be kept at least 20%, 620 credit score (minimum) and a debt-to-income ratio (DTI) of 43% or less.
Home Equity Loan
Home equity loan is a second mortgage that offers you a lump sum of cash that you borrow against the equity of the house.
Unlike cash-out refinancing, home equity loans do not replace your old mortgage. Instead, you must pay this second mortgage along with the previous one.
Most lenders require that you keep at least 20% of the house equity to secure a home equity loan and most lenders allow you to use 80% of your home’s equity for the loan.
If you wish to calculate your home’s equity, then simply subtract the value of the home from the mortgage.
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