What Is A Capital Stack In Real Estate And 4 Different Layers?
HOME EQUITY
A home equity loan is a loan that is available for the homeowners against their equity share in their home. But why would you want a home equity loan and what exactly is it? The why part is easy, when you are thinking about a major expense such as remodeling your kitchen or looking to consolidate your bills, a home equity loan would help you achieve these goals. But what is home equity?
What is Your Home Equity?
Let us say that you bought your home for $200,000 taking a mortgage of $160,000 with a down payment of $40,000. The down payment that you made of $40,000 when you bought the house is your home equity. Let’s say, you have been making your mortgage payments for five years and you have knocked your mortgage balance down to $100,000, on top of that your home may also have changed in value, let’s say $300,000 is the current property value. So take the current value of $300,000 and subtract the money you still owe on the mortgage which is $100,000 and you will get your home equity which is $300,000 - $100,000 = $200,000. A home equity loan allows you to borrow against that value.
Types of Home Equity Loans
Just like your mortgage a home equity loan is also called a secured debt as it is given against your property because of which you get better interest rates and higher borrowing amounts compared to unsecured loans. There are three types of home equity products.
1) Home Equity Line Of Credit (HELOC): A HELOC functions more like a credit card with an approved borrowing limit which you can access as you need over time. The interest rates on a HELOC is a variable that can move up and down based on market fluctuation. Since your payment is determined by how much you borrowed and your current interest rate your payment varies as you change the amount you borrow or as the interest varies.
2) Home Equity Loan or Second Mortgage: Home Equity Loan usually offers a fixed amount for a fixed time with a fixed rate of interest and predictable regular monthly payments. It works similar to your primary mortgage but could be with a different lender for what it matters. Since the interest rates are fixed you would be getting a lower interest rate compared to HELOC. HELOC acts as a second lien on your property and hence is also called a second mortgage.
3) Cashout-Refinance: A Cashout-refinance is a transaction where the borrower gets a loan against the home equity accumulated over the years, combines it with the current primary mortgage, and make one single payment. For example, you have a mortgage balance of a hundred thousand dollars and you need to borrow fifty thousand more, with cashout refinance your new loan amount would be one hundred and fifty thousand dollars and you would make one single payment towards your new loan.
Best Use Of Home Equity Loan.
You can use a Home equity loan for any reason, however, the most common uses for using the home equity loans are as follows:
1) Major Expenses: A home equity loan typically offers a better interest rate than any other unsecured loans. So paying for large expenses such as weddings, college, or any medical emergency with home equity loan may be a good way to handle your finances.
2) Home Improvements: This is one of the most common uses of home equity loans. Using loan proceeds to pay for home improvement projects such as renovating your kitchen, adding a bedroom, or upgrading your roof, can be a great way to increase the value of your home. In some cases, the interest that you pay may also be tax-deductible.
3) Debts Consolidation: Home equity loans offer many advantages over other types of loans. Since home equity loans are secured by your home they often offer a lower rate of interest compared to many credit cards or personal loans. Through debts consolidation you can save money on the high-interest debts.
Why Use Compare Closing For Your Home Equity Loan Requirements.
Sometimesmajor expenses can come as surprise, however, if you have enough home equity you can use it as one of the best financial tools to get through such surprises. Compare Closing LLC bring a ton of experience from best in class leaders who would not only provide you the best cashout-refinance options but would do it with optimized closing costs. If you want to pay off high-interest debts, get cash for remodeling your home, or want to pay for your kid's college, call Compare Closing LLC where we will compare from our preferred lenders and provide the best deal in the market for you.
