Is It Time to Cash in on Your Home’s Equity?

December 4, 2015
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Since rising home prices have increased equity levels, now might be the right time to cash in on your home’s equity.

Image courtesy of ponsulak at FreeDigitalPhotos.net.

Image courtesy of ponsulak at FreeDigitalPhotos.net.

According to a recent New York Times article, the sales volume of single-family home and condominiums reached the highest level during the first three quarters of this year when compared to the same period in 2006.  Additionally, homeowners who sold their homes during the third quarter benefitted from the highest price gain in in eight years which was an average increase of seventeen percent or $40,658 above their purchase price.

Here are two ways to cash in on your home’s equity.

Cash-out refinance- This option pays off your existing first mortgage layer thereby enabling you to pull some of your home’s equity in a lump-sum cash payment at closing.  Since the first loan is paid off, a new mortgage loan is given which may have different terms than your original loan since it is an entirely new loan.  For example, you may have had a thirty-year fixed mortgage on the first loan, but now are considering a fifteen-year loan term or other loan types since mortgage rates are still relatively loan.

This option is ideal for homeowners whose equity has increased substantially since they first purchased, however there are some lending guidelines.  For example, borrowers are typically not allowed to cash-out more than eighty percent of the value of their homes, although some government programs do allow cash-outs of up to 85%.

The top reasons homeowners choose to do a cash-out refinance are:

  • Home improvements
  • Debt consolidation
  • College Expenses

Home equity line of credit- Unlike a cash-out refinance, a home equity line of credit, or HELOC, is usually taken out in addition to your existing first mortgage when you originally purchase your home.  Rather than replacing your first mortgage as in a cash-out refinance, the HELOC is considered a second mortgage as it carries its own terms and repayment schedule which is entirely separate from the first mortgage.  If your house is completely paid off and you have no mortgage, some mortgage lenders allow you to open a home equity line of credit in first lien position.  This essentially means that the home equity line opened on your paid-off home will be your first mortgage.

If you are buying a new home, it makes sense to open a HELOC just in case you need some cash in the future, however your eligibility will depend on the first mortgage loan terms, your credit and a few other criteria.

If you already own a home that you want to remain in and its equity has increased significantly since you first purchased it, consider doing a cash-out refinance.  According to Matt Hackett, the underwriting and operations manager for Equity Now, homeowners located in Manhattan and Brooklyn boroughs are taking advantage of climbing home values by taking cash-out refinances.  Perhaps you should too.

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