Over the past several years, home values in the area have gone up dramatically. And that means that homeowners have much more equity in their homes than they did only a few years ago. One of the big advantages of having more home equity is that you have more borrowing power. Secured loans using the equity in your home can help you finance home renovations, pay for a child’s tuition, give you start up capital for a business and help you consolidate debt, among other things.
But what are your options when it comes to borrowing from your home equity?
There are three main choices including home refinancing, second mortgages, and home equity lines of credit.
Home refinancing
This is when you break your current mortgage in order to get a new one. The new mortgage will be for the amount that you still owe on your home, plus the amount of money that you would like to borrow from your home equity. You then make your payments on the new mortgage as normal.
Of your three options, home refinancing usually has the lowest interest rate but because you are breaking your mortgage, there will also be a financial penalty. This option is usually chosen by homeowners who are close to their mortgage renewal date since this will cause the penalty to be lower.
Second mortgage
Unlike home refinancing, this option does not require you to break your first mortgage. A second mortgage is simply a loan secured by the equity in your home (most lenders allow you to borrow up to 80% of your home equity).
You receive the cash in a lump sum and make payments on it just as you would any other mortgage. With this option, interest rates are a little higher than with home refinancing but there is no financial penalty which makes this a good option if your mortgage renewal date is farther away.
Home equity line of credit
Unlike a second mortgage or home refinancing in which you receive your money in a one-time lump sum, a home equity line of credit or HELOC is a revolving line of credit that works similarly to a credit card. You get approved for a certain amount and then you can borrow and repay as often as you like as long as you don’t exceed your limit. You are only charged interest on the amount you have borrowed.
This option is best for homeowners with long-term borrowing needs and those who have the discipline to keep up with their payments and only borrow what they need.
Contact AKAL Mortgages today!
If you would like to learn more about your options for borrowing from your home equity, contact us today to speak with one of our brokers.
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