Taking equity out of your home can be confusing. This article won’t cover the reasons that you may want to take equity out of your home, but it will cover the ways in which you could take equity out of your home if you wanted to. And if you are unsure of what home equity is, check out this article for a full explanation. 🙂 Let’s get started.
Taking Equity Out of Your Home #1: Home Equity Line of Credit (HELOC)
The first way that you could take money out of your home is with a HELOC.
A HELOC is basically a revolving loan against your house. Think of it as like a really big credit card (usually without the really high interest rate though) that you can borrow against, pay off, and borrow against again, and pay off again as needed.
Homeowners use HELOCs for a various number of reasons. In my time as a banker, the number one reason that I saw for someone taking out a HELOC was to do home repairs and/or upgrades.
With a HELOC, they could do something like remodel the kitchen and then pay it off over time. Then later they could remodel a bathroom or add a deck and then pay that off and so on.
Of course, someone wouldn’t have to use it for home repairs. That is just the number one reason I saw people using HELOCS.
A couple of things to consider when taking money out of your home with a HELOC is that generally they will have variable interest rates and each bank will structure them a little different.
Also, as with any way to take money out of your home, you have to have equity to begin with. If you purchased a home six months ago and only had a small down payment, you will likely not have much (if any) equity.
Taking Equity Out of Your Home #2: Second Mortgage
The second way that you can take money out of your home is by getting a second mortgage.
With a second mortgage, you will actually have two mortgage payments. The first one will be your regular mortgage payment that you have always had. And the second mortgage will have a whole other payment.
If you get a second mortgage, you don’t have to go with the same bank/lender that has your first mortgage if you don’t want to. You can shop around rates, terms, etc.
Once again though, you will have to have built up equity in your house to be able to take out a second mortgage.
Make sure that you understand the interest rate that will be assessed with the second mortgage. It will not necessarily be the interest rate that you have on your first.
Taking Equity Out of Your Home #3: Reverse Mortgage
Reverse mortgages are another way that you can take equity out of your home. However, generally they suck.
Reverse mortgages are for older homeowners (generally age 62 and older) who want to turn their equity in their home into cash.
There are a lot of rules and regulations around reverse mortgages because they target older homeowners and older homeowners are more likely to not understand what they are signing or how the product works.
Reverse mortgages tend to have really high fees and a lot of hooks in them. My advice has always been to steer clear of reverse mortgages if at all possible.
Taking Equity Out of Your Home #4: Refinance
The last way that you can take equity out of your home is to do a regular refinance of your mortgage.
A refinance means that you will no longer have your old mortgage, you will have a new one.
This is really the most straightforward way to take equity out of your home.
If you are thinking about doing this though, be careful!
Your interest rate will change.
Your payment will change.
If you had a 30-year mortgage and you get another 30-year mortgage you will pay back more interest over time and be older when you eventually pay it off.
Final Thoughts
Sometimes you may need to take out some equity in your home. Maybe as a way to do home upgrades, pay college tuition for your children, help with an aging parent, etc.
But make sure to consider all of the costs.
You will have to pay that money back eventually.
I have seen several clients over the years get sucked into a debt spiral because they take out money in their home every few years instead of building their equity in their home and paying for those expenses with other money.
But if you need to take out equity, those are the ways to do it!
I am here for you!
You can do this!
Until next time!
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