August 3, 2017

Wooden block house on money with piggy bank

Although a lot has been made of the most recent housing crisis, the fact is that all things indicate it is behind us. In fact, in 2016, the median home sale price rose 5.6%. Most people will be surprised to find out that since 2011, median home prices have risen 40%. Of course, just as many people will likely point out that they have merely re-gained value lost. I guess it’s a glass half-empty, glass half-full sort of thing.

One of the positive consequences of this rise in home value is that more home-owners have built (or re-built) their equity position. This means they have considerably greater financial flexibility than they had a few years ago. This raises the question, “How can I take advantage of this situation?”

There are a variety of financial vehicles you can use. The three most prominent are cash out refinancing, a home equity loan (HEL), or a home equity line of credit (HELOC). All have their specific pros and cons. Lets take a look at each.

Cash Out Refinancing
The cash out refinancing option allows the home owner to obtain the difference between what they owe on their mortgage, and what the home is valued at in the current market. An example would be a home valued at $150,000 for which the home owner still owed $130,000. The difference, or the “cash out value” is $20,000. The amount of equity you can cash out (in this case $20,000) is typically between 70 and 100%.

When cash out refinancing is done, the home owner (in the case above) would have a new “first position lien”, or mortgage, of $150,000 (the current market value). Common reasons for cash out refinancing, (as well as for HEL or HELOC) are:
o Home improvements
o Financing a business or a second property
o College or medical expenses
o Funding other investments
o Paying off other high-interest debt
o Vacation

When comparing the Pros and Cons of cash out refinancing, they look like this:
(+) Allows the home owner to (in some instances) lower their current interest rate
(+) There is only one loan and one payment
(+) The interest charged may be deductible
(-) You may add years (15, 20, 30) to your payoff
(-) You must borrow all the money at once
(-) The closing process can be lengthy with high closing cost (7% of loan value)

Home Equity Loan (HEL)
The HEL uses the equity in your home as collateral. This is a closed-end loan, or second mortgage, which places a second position on the property. It is typically shorter term (5-15 years) and is a fixed rate (although adjustable rates are available). The proceeds are paid out in one lump sum.

When comparing the Pros and Cons of a Home Equity Loan, they look like this:
(+) The terms of the first mortgage remain unchanged
(+) The acquisition cost of an HEL is typically lower than a cash out refinancing
(+) The interest charged may be deductible
(-) The interest rate for a HEL is typically higher than for cash out refinancing
(-) The fees are higher than for a home equity line of credit.

The final option we will examine is a home equity line of credit, which are similar to a HEL. One of the major differences between the two are that a HELOC does not pay out in a lump sum. Instead, it functions as a revolving line of credit. The rate is adjustable, based on the prime rate with a margin (a typical margin may be 1.5%, but will vary between lenders).

When comparing the Pros and Cons of a Home Equity Loan line of credit, they look like this:
(+) You only borrow what you need
(+) Interest does not accrue until you borrow
(+) The Interest rate is often lower than that of a HEL
(+) It is easier and quicker than an HEL with lending restrictions
(-) The interest rate is adjustable and can go up.

Ultimately the right choice depends on each individual homeowner’s circumstances. When working with our borrowers we try to understand their income, cash flow and tolerance for risk when making recommendations about which path to take when pursuing a home equity loan. If you would like to discuss which option would be right for you, I would love to speak with you. Feel free to contact me anytime and we can get started on getting you the perfect home equity loans for your needs.


Ann Capaldi

Branch Manager

NMLS#: 571247

Ann Capaldi

Branch Manager

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