Value in Your Home’s Equity

Maybe you are already familiar with home equity – that dormant asset that is locked in your home. Equity is calculated by subtracting the appraised value of your home from your current loan balance on the home.

Example: If you owe $250,000 in secured mortgage debt and your house is worth $400,000, you have a total equity position of $150,000 in the home. 

There are several ways to access the equity in your home and the strategy you take has both short-term and long-term implications.

Sale of Real Property:
If you were to sell your home now and pay off the balance of your liens against the property, you’re going to walk away with the difference in cash. This will give you the equity accumulation as a lump sum. While this option gives you quick cash, it also leaves you without the home.

Home Equity Loan:
This loan product lets you access the equity in your home by converting it into cash. If you have a primary mortgage on the home, some lenders will allow you to take out an additional mortgage against the property to access more funds. This secondary loan or second mortgage typically comes in two flavors:

1. A Fixed Home Equity loan with a set interest rate and repayment plan which will give you one lump sum of cash, or
2. A Home Equity Line of Credit (HELOC) which is a revolving line of credit on a variable rate. It basically works like a large credit card with the home as collateral in the event of default.  You can borrow against the Line of Credit when you need and pay it back during its draw period.

Home Equity Loans are good loans for folks that are looking for short term cash and have the ability to pay the loan back quickly or have the financial means to absorb the additional mortgage payments.  These types of loans do have some drawbacks.

• They are typically more difficult to qualify for.
  • Credit qualifications are more stringent and higher scores (700+) are needed.
  • Income qualifications are tighter as borrowers must now qualify for two mortgage payments plus their existing debt load.
• You need to have more equity to qualify.
  • These loans don’t give you as much access to the equity in your home as a traditional mortgage.

Mortgage Refinance with Cash Out:
This option lets you replace your current loan with a larger mortgage by refinancing the balance owed. It’s another method to take the equity in your home and convert it into usable cash. By replacing your current balance with a larger balance, the difference in the two loans is given to the borrower as one lump sum of cash.

Mortgage refinance with cash out is typically a better choice for folks who plan on staying in their current home long term or don’t have the additional income to support two mortgage payments.

• Loans of this nature are often fixed rate programs meaning you will only have one monthly payment and that payment is not subject to market changes.
• Qualifying for a mortgage is typically easier than a home equity loan as the borrower only has to qualify for one mortgage payment and credit qualifications are more flexible
  • Some loan programs allow for approval at 620 FICO scores
• You can typically access more of your home’s equity with a first mortgage.

Turning your home equity into cash could allow you to afford college, make a major purchase, do home improvements, etc. Your home’s equity is valuable and you have a variety of ways to access it.