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Best Home Equity Loan Banks
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Cash Out Refi Vs. Home Equity Loans
Yes, you can use your home equity for investments. Home equity — the positive difference between the value of your home and what you still owe on the mortgage — not only contributes to your overall net worth, but can also be tapped for a variety of financial uses.
For example, let’s say your home is worth $300,000 today and you owe your mortgage company $180,000 before the loan is paid off in full. This leaves you with $120,000 in home equity.
If you wish, you can withdraw some of that equity to invest and grow your money elsewhere. But how exactly do you access equity? You have three main options:
One of the most popular ways to tap into your home equity is through a cash-out refinance. This process involves refinancing your existing mortgage, taking out a new loan for an amount higher than what you currently owe. Your lender will give you the cash difference, which you can invest elsewhere.
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In the example above, you can use a cash-out refinance to remove up to $60,000 in equity from your home. You can use a cash-out refinance to take out a $240,000 loan (your current mortgage loan balance of $180,000, plus $60,000 in equity) and start making monthly payments on the new loan.
Another option for tapping equity is through a home equity loan, sometimes called a second mortgage. This type of loan is secured by the equity of your home and is similar to a mortgage loan on the property – it often has similar requirements to a home appraisal.
With a home equity loan, you get a lump sum that is repaid in monthly installments. Loan terms typically range from five to 30 years, and you may be offered lower interest rates with a home equity loan than you would find with an unsecured personal loan.
Like a cash-out refinance, you’ll likely pay closing costs when taking out a home equity loan.
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Finally, there is the home equity line of credit (HELOC), another type of second mortgage secured by your home. It differs from a home equity loan or cash-out refinance, however, as this line of credit is open-ended and available for a specific drawdown period. This allows you to use it whenever you need money.
A HELOC works like a credit card. You are given a borrowing limit, which you can choose to spend or not, and often a variable interest rate. If you use your available credit, you will need to repay the balance and interest charges; Then, you can spend again up to your credit limit.
Let’s look at six ways people can use their home equity for investments and see if you should consider doing so.
At some point in your career, you may decide that you would benefit from additional education. This could mean college or trade school classes, specialized courses, or specific designations within your discipline.
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You might consider using a home equity loan to pay for that education, which is an investment in your future. However, not all occupations benefit enough from higher education to warrant the cost. Make sure you check what is realistic for your job and whether there is an adequate return on investment.
You should also consider the rate you would receive on a traditional federal student loan before withdrawing from your home equity. If you finance your education with a federal loan, you’ll not only have access to low interest rates, but also flexible repayment plans if you can’t afford your payments. Conversely, if you find it difficult to repay a home equity loan, you could lose your home to foreclosure.
Whether you want to improve your home to prepare it for sale or update your living space, using your home equity to invest in home improvements is a popular decision. In addition, some improvements can increase the value of your home beyond the sticker price, helping you build more equity in your property.
However, it may have a downside. It is important for homeowners to research home improvement projects that offer the best returns in their area. Some may not be worth the cost, especially if you are making improvements to increase the resale value of your home. This is especially true for highly personal remodeling projects.
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Finally, consider when to invest in home improvements based on how long you plan to live in the home. If this is your forever home, this shouldn’t be so important. If you plan to sell, you may want to enjoy your efforts (renovation dollars) before selling the property, especially if your improvements will not maintain resale value.
If you are looking to invest in a company or grow your existing business, a home equity loan can seem like an easy and simple option.
According to Tom Hutchens, executive vice president of Atlanta-based Angel Oak Mortgage Solutions, the difficult process of securing a business loan can make pulling out of home equity seem very attractive.
“Getting a mortgage is a very simple process. Qualifying for business loans requires a deep dive into the business itself,” Hutchens said. “With your home, you already have instant equity.”
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However, the US Bureau of Labor Statistics reports that only 50% of businesses with employees make it at least five years. For this reason, business owners should have a plan to repay the home equity loan even if their business fails.
Investing in the stock market is without any guarantees. However, watching the growth of the S&P 500 over the past 10 years may encourage some homeowners to use their home equity loan proceeds to invest in the market, hoping to earn more return than they would pay in interest.
“It’s extremely risky to take out a loan against property to catch the next unicorn,” said John Mazza, president and CEO of Summerfield Wealth Advisors and a former financial advisor at Southeast Financial Services in Greensboro. “Everyone wants a unicorn, but it is slowly and steadily winning the race with the markets.
If you are looking for an investment property, want to start flipping houses, or want to buy a second home/vacation home, you can use your home equity to buy another property.
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However, there are risks associated with investing in real estate, especially flipping. Investors should have a deep understanding of the market they are entering, how to price the property to move or rent quickly, and how to deal with other concerns. If you are renovating an investment property, establish a strong relationship with the contractors doing the work and be prepared to support the carrying costs of the property until it is sold or rented.
You can also use your home equity to invest in your own financial stability by working to eliminate any existing consumer debt.
If you’re currently paying off credit card debt, student loan balances, or high-interest personal or car loans, it’s worth considering. When you’re essentially trading one debt for another, using your home equity can help you get out of debt faster than scheduling your current payments. You can also improve your credit score in the process.
Be careful not to go back into debt after zeroing those balances. For example, if overspending is a problem for you, pay off your credit balances and cut up physical cards so you can’t use them.
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Keep in mind the following advantages and disadvantages of using your home equity to invest, especially if you are wondering how to use your home equity in the most beneficial way.
You can usually get more competitive interest rates than consumer loan products. If you need cash and don’t have liquid savings available, your options are usually limited to a personal loan, credit card cash advance, or borrowing from your home equity. Fortunately, interest rates on cash refis, home equity loans, or HELOCs are much lower than other consumer products.
You will find that the underwriting process can be simple. Compared to business loans and larger personal loans, tapping your home equity is generally easier.
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