May 4th, 2018 6:40 AM by Jackie A. Graves, President
have more equity today than ever before.
have $5.4 trillion in total tappable equity, which is 10 percent higher than
the previous record high in 2005, according to Black Knight,
a mortgage-focused data analytics company.
the opportunity to get a cash-out refinance, home equity loan or home equity
line of credit is alive and well. But how much equity can — or should — you
extract from your home?
limit how much equity you can take
ago, homeowners could borrow up to 100 percent of their equity, says Jay
Voorhees, broker and owner of JVM Lending, a mortgage company in Walnut Creek,
most lenders put significantly lower limits — like 80 to 90 percent — on home
how much you can get from a home equity loan is straightforward. If your home
is valued at $300,000 and you owe $250,000, then you have $50,000 of equity in
your home. If the bank gives you a loan for 80 percent of your equity, you
would get $40,000 (50,000 x 0.80 = 40,000).
how much you need
says borrowers should “go to the limit” with a home equity line of credit, or
HELOC, because they don’t have to tap the full amount of the credit line that’s
might be smart from a financial perspective, but for some people, the
temptation of an open credit line can be a problem.
conservative approach is also recommended for a cash-out refinance or home
equity loan, either of which involves a fixed amount, rather than an open
who want to tap equity for home improvement projects — the most common use
of this type of loan — usually settle on a specific amount, plus some wiggle
room for cost overruns, says Kelly Kockos, senior vice president of home
equity for Wells Fargo in
you’re looking to tap the value in your home, learn more about the requirements to borrow from your home equity.
how each type of loan works
refis, home equity loans and HELOCs aren’t risk-free.
should try to pay off a HELOC, in particular, within a reasonable time, though
they may elect to keep the line open for future use.
second mortgage for a fixed amount, at a fixed interest rate, to be repaid over
a set period.
second mortgage with a revolving balance, like a credit card, with an interest
rate that varies with the prime rate. Pronounced HE-lock.
mortgage refinance for more than the amount owed. The borrower takes the
difference in cash. Also called a cash-out refi.
equity rates are still low
equity loans and HELOCs typically carry much lower rates than credit cards.
equity loans are advantageous because the rates are usually lower, and they’re
easier to qualify for since the banks are using your house as collateral,” says
Samuel Rad, CFP professional at Affluencer and instructor at UCLA.
example, as of April 25, the average interest rate on variable-rate credit
cards is 16.93 percent, compared with 5.57 percent on home equity loans and 5.90 percent on HELOCs.
makes home equity loans or HELOCs a good option for consolidating high-interest
debt. One important factor: Under the new tax plan, starting in 2018, home
equity interest payments are no longer tax-deductible unless
they’re used for home improvements or renovations.
a cash-out refinance loan, you essentially replace your mortgage with a new
one. This means you will just make higher monthly payments, which will include
the money you were loaned.
who are in the second half of their mortgage amortization should beware, Rad
says, as they will have to start paying interest all over again with a cash-out
a 30-year fixed-rate mortgage, people are paying interest for the first 15 years,” Rad
says. “After that, they begin paying down their principal. The drawback of a
cash-out refi is that the process resets, and they have to start paying
Home values can crash
reason to be careful with home equity loans is that the value of your home can
fluctuate — up or down — over time. If you take out a big loan and the value of
your home drops, you could end up owing more than what your house is worth.
had a financial crisis just nine years ago, which showed us home values can
drop suddenly. This is something borrowers should think about before taking out
equity from their home,” says Ben Dunbar, an investment adviser representative
for Gerber Kawasaki Investment and Wealth Management.
house is on the line
taking out a home equity loan, remember that if you default for any reason, you
can end up losing your home.
risks of getting home equity loans are big because your house is the
collateral,” Dunbar says. He recommends you know exactly how much you need and
try to repay it as soon as possible.
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