There’s a lot of talk about property values on the rise, resulting in high levels of home equity. According to Forbes, "Americans have started cashing out some of the record amount of home equity they gained as property values surged during the pandemic." Show
Because of this boom, many homeowners continue to look to programs like home equity loans and lines of credit. If you’re interested in taking advantage of the equity in your home but are unsure how to get started, take a look at these options and ask yourself the following questions. What is a home equity loan?A home equity loan is like a second mortgage, allowing you to borrow against your property assuming there is enough equity available. How much equity can I borrow?The maximum home equity loan amount you can get depends on what your home is worth. And, the amount your mortgage is worth depends on the cost of your house. You’ll get a percentage of that worth for your first and possibly second mortgage. Today, most companies will limit the loan to value for home equity loans combined at around 90%. This means the maximum most banks are willing to give is an 80-10-10 mortgage. So, you can get an 80% loan to home value first mortgage, a 10% loan to value second mortgage, and you’ll have to put 10% down. For instance, if your house is worth $100,000, your first mortgage would be set at $80,000, and your second mortgage could be at $10,000. This means that the highest combined home loan amount you’ll get will be around 90% of your home’s value. Bad credit? Don't let low credit stop you from refinancing. We can help! Learn How What is the difference between a home equity line of credit (HELOC) and a home equity loan?When you get a home equity loan, you will receive the full amount when you close the loan. This makes a home equity loan preferable for anything where you need a large lump sum. On the other hand, a HELOC provides you with a line of credit, giving you access to cash as needed. HELOC is often the product of choice for people who need extra cash for long-term projects like home improvement. Our mortgage consultants can also talk to you about our First Lien HELOC product to see if it may be a good loan option for you. Will I lose equity when refinancing?Not necessarily. If you decide on a rate and term refinance, you're essentially trading loans. You will see a drop in equity, however, if you opt for a cash-out refinance. Are there other home equity refinancing options?Cash-out refinanceThis option allows you to refinance your current mortgage (often at a lower interest rate), and you can turn your home equity into cash. It’s another common approach for homeowners who are looking to spend a significant dollar amount on a long-term purchase, like a home renovation or down payment on a second home. A cash-out refinance works by writing your existing mortgage into a new mortgage at a higher amount (depending on available equity). This allows you to receive the difference between the two loans in cash. Reverse mortgageThis option is reserved for homeowners who are 62 years and older. It allows them to access tax-free cash in a lump sum, via monthly payouts, or even as a line of credit. A reverse mortgage is a great way for retirees to use their home equity to preserve their wealth. If you’re looking for a relatively easy way to access cash, it’s time to consider your home equity and the many ways of accessing it. A great way to get started is by calling the mortgage consultants at American Financing. You can learn about options that make sense for your financial goals. What does equity mean in a home?Let's begin by understanding what equity means in a home. Equity is the value you build up over time in your home. First, your home would need an appraisal. You want an accurate measure of your property value. The equity is the difference between the appraised value of the home and how much is still owed in a mortgage. For example, let's say your home appraises at $270,000. The balance due on your mortgage is $140,000. This means you have $130,000 in equity in your home. Another way to think about the equity in your home is that it's the part of your home that you already own. Now that you understand equity, you might be wondering if you can actually borrow all the equity you've built up in your home. It would seem like since you have created it, shouldn't you be able to access all of it? The quick answer is no, you can't borrow the whole amount. Remember, if you want to borrow the equity in your home, you'll need to visit a lender to gain access to those funds. More on your options for how to do this later. The lender won't allow you to borrow the entire amount of equity. Most lenders will only allow you to borrow up to 85% of the equity you have built up. This number varies from lender to lender. Let's talk about how you know what percentage you can borrow. Loan-to-value ratioThe lender will use a term called the loan-to-value ratio. They will use the loan-to-value ratio to decide on the amount of equity you're able to borrow. Here's how you calculate your loan-to-value ratio. Again, you need to know those two important numbers, how much you still owe on your mortgage and what your house appraises for. Take your balance owed and divide by the appraisal value to get a percentage. This percentage is the loan-to-value ratio. Let's use the previous example where the mortgage still had $130,000 owed on the home worth $270,000. Here, you would divide the $130,00 by the $270,000 to get a loan-to-value ratio of around 48%. This means you have 52% of the equity in the home and a lender would surely think you could access the equity in the home. This still doesn't mean you can access all of that equity. No lender will allow you to take every bit of equity from your home. This is where you need to know their loan-to-value ratio requirements. Say the lender has a loan-to-value ratio of 80%. In the above scenario, and with the right credit score, you could borrow 80% of $140,000 of equity you have or up to $112,000. Remember, that the loan-to-value ratio number varies from lender to lender. What other factors will impact accessing equity?Anytime you apply for a loan, even if you're borrowing against your own equity, the lender will consider what kind of lending risk you are to them. They are still giving you money and have some risk. Let's take a look at what factors a lender will consider when you apply to access the equity in your home through either a home equity loan or home equity line of credit.
What options do you have to access equity in your home?Now you understand how to calculate how much equity you can access and even how to tell if you're a good candidate to get it. What options are available to you to borrow on your built-up equity? Let's take a closer look at the options you might want to consider. Home equity loanA home equity loan is a lump sum loan amount. You're using the available equity in your home as collateral to gain access to the loan. You decide how much you want to borrow and it's paid in one sum to you. The terms are similar to a regular mortgage. There is:
The borrower repays this amount back over a set period of time. This time period is usually a much shorter time period than a regular mortgage though. For most borrowers, even those with good credit, the home equity loan has a slightly higher interest rate than a regular mortgage. If the borrower were to foreclose, the original mortgage borrower would get paid back first from the home sale before the home equity lender. This means the home equity loan lender is taking on a little more risk since they're second in line. Home equity line of creditAnother option is called a home equity line of credit or a HELOC. Like a home equity loan, you're accessing equity from the home. In this case, the HELOC is a line of credit that you access when you need funds. Instead of it being paid in one lump sum like a home equity loan, you access it as you need it. A home equity line of credit will have a revolving balance like a credit card does because you'll access money as needed and continue to make payments toward the balance. Most HELOC loans are structured in two parts. For a set period of time, you can access the equity as needed, then during the second part, you can no longer access funds and instead are just paying off the borrowed equity. Cash-out refinanceA cash-out refinance is another way to access equity but it works a little differently than the other options. It's like getting a brand new mortgage to replace your existing one. In this case, you borrow more than is owed on the house. You might still owe $80,000 on the mortgage. But with a cash-out refinance you borrow $110,000. The first $80,000 pays off what is owed and the remaining $30,000 is paid to the borrower in cash. Reverse mortgageThis is another option available to access the equity in a home but it's only available to homeowners who are 62 or older. A senior might get a reverse mortgage on their home to access funds from the equity they've built up over time. In a reverse mortgage, a borrower can get the funds:
Reverse mortgages have many rules for both borrowing and repayment. They are also very expensive for the borrower. If you are eligible and want to consider a reverse mortgage, you should do your due diligence and read the fine print carefully. Considering a home equity loanThe most common way to access home equity is either through a home equity loan or a home equity line of credit. Let's take a closer look at the pros and cons of these options.
Wealth or liquidity?As you consider whether accessing home equity is a good idea for you, it's important to remember where the money comes from. Borrowing against the equity in your home may provide you some cash flow. Yet, it's important to remember that money shouldn't be classified as wealth. Many people spend much of their adult lives working to pay off a house so they have the equity as a senior citizen. If you access equity, you are really just transferring assets. You're making the assets held in your house liquid. There's some risk in spending your equity if you don't remember this concept. Increasing equity in your homeAre you looking for ways to increase the equity in your home? Maybe you don't have enough equity built up in your home to make a home equity loan or home equity line of credit feasible or worth it. How can you build up equity more quickly in your home?The most obvious way is when you pay your mortgage payment each month. Every time you make a payment you increase your equity, even if it's by a small amount. If you can extra on your mortgage each month, then your equity will grow even more quickly. When you're able to make home improvements to your home, you could be adding value to the home. When the value increases, you're increasing your equity overall. Make sure when you consider home improvements that you do some research on what gives you the best return on investment. Real estate is almost always a sound investment and property values increase over time. As property values increase and you owe less, your equity increases too. If you're just in the process of buying a home, know that any money you use as a down payment becomes equity in your home. So, the larger your down payment, the more equity is sitting in your home. Understanding how to pull equity out of your homeBuying a home is a huge step for so many people and one that fulfills the goals of homeownership. It allows you to make those monthly payments on the home knowing you acquiring equity in the home until you own it outright. One of the benefits of growing the equity in your home is being able to access it when you might need it. It's good for you as a homeowner to know how to pull equity out of your home when you need it. Knowing the different ways to access that equity gives you the power to make the best decision if you want to borrow the equity from your home. Wondering what your home is actually worth? If you're ready to sell your home, we can help with that too. Use our home iValuation calculator to see what your home is worth and how to sell it quickly using our network. How much loan can I get on equity?Eazzy Loan is an easy loan to get, without the need for guarantors or filled out forms. Get up to KSh3 million, instantly on your phone through the Equity Mobile App, your Equitel line or by dialing *247# where you can monitor your loan balance and make repayments.
What percentage of equity can I cash out?Your refinance rate depends on your credit profile and how much cash you take out. You can typically cash out up to 80% of your home equity. Your new loan will be larger than your old one, so you'll pay more in mortgage interest in the long run.
Can you borrow more if you have equity?If you borrow more than the amount by which your equity has increased, then your loan-to-value ratio will rise. This may result in higher repayments, so you'll need to make sure you can afford these (and will continue to afford them even when interest rates rise).
How much equity do you need to get another loan?As a general rule, you should aim for a 20% deposit for your new property. Remember, your usable equity that you could put towards a deposit for a new property is 80% of the current value of your home, minus what you still owe on the loan.
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