This presents more funding options for those who want to renovate a kitchen, tackle other home improvement projects or simply pay for major expenses. Using your home’s equity is a smart way to get things done, but should you get a Home Equity Line of Credit (HELOC), a home equity loan or a cash-out mortgage refinance?
Making the right decision for you will depend on your individual financial situation. We’ll take a look at all three to give you a starting point.
Home Equity Line of Credit
A HELOC is an open line of credit calculated by using the appraised value of your home and your current mortgage balance. This revolving credit functions much like a checking account. You may write checks against your available credit or take out cash and use those funds for home improvement projects or anything else. Some financial institutions even provide a debit card for use with it.
HELOC rates are usually lower than a credit card which makes it a smart borrowing option for homeowners. The rate may be fixed or variable, depending on your lender. Typically a HELOC loan has an initial draw period of 10 years, where you make interest-only payments. After the draw period ends, you enter a repayment period when the remaining balance and interest must be paid over a set term, such as 15 years. HELOCs are best for on-going or multiple projects, or in case of emergency.
Home Equity Loans
Home Equity Loans also tap into your property’s equity, but instead of a revolving line of credit you receive a lump sum of money upfront to be repaid over an agreed upon term. Repayment starts the month after you receive your loan. Home Equity Loans give you a predictable monthly payment with a fixed interest rate to make it easier for you to budget.
Like a HELOC, this loan is considered a second mortgage and must be paid off before you are able to sell your property. Home Equity Loans are best for those who are looking for steady monthly payments in return for the loan amount upfront.
A third funding option for homeowners is a cash-out refinance. Just as it sounds, this means refinancing your current home loan into a bigger one, allowing you to take the extra cash for your needs. There are limitations on how much cash is available to you, based on your home’s property value, your credit score, the loan-to-value ratio and other factors.
Cash-out refinancing may be a good funding option with today’s low rates and high property values. It’s also a cost-effective way to get the cash you need upfront. If you’ve been considering refinancing your home loan, this provides you an additional incentive. This type of loan is best if you bought your home when interest rates were high. Now, you may be able to refinance at a lower rate and receive cash back for your projects.
Deciding on how you’ll fund your project is just the first step. Before you apply, check our loan rates as well as our online calculators to see how the numbers work out. You should also check your credit score to see if you need to address any issues. If you need help, Experian Boost can help your credit score immediately. Another tip is to ensure all of your financial records are organized so you can quickly provide any required documentation.
Travis Credit Union is here to help. You can apply for any of these loans online. If you’re not sure where to start, contact one of our knowledgeable mortgage loan consultants. They’ll help identify the right loan for you and walk you through the process. You can learn more about us at traviscu.org.