Tapping Into Equity to Improve or Maintain Your Property

When the housing supply is tight and interest rates are on the rise, many homeowners choose to just stay put and enlarge or enhance their existing home until the market is more favorable. Those who own older homes may grapple with a heating and air conditioning unit that finally bit the dust, aging wood trim or windows that need replacing.

While home renovations can be planned, some expenses pop up unexpectedly at inopportune times. When paying cash is not an option, homeowners should consider tapping into the equity they’ve built in their home. The interest rates for borrowing against equity are lower than most credit cards, which charge, on average, 18-20 percent or more. Two primary ways to do this are through a cash-out refinance or a home equity line of credit.

When mortgage rates are super low, homeowners often benefit from refinancing their higher-rate mortgage and taking additional cash out for renovations at the closing. A refinance replaces the existing mortgage loan. If you refinance for a shorter term than your existing mortgage, each payment goes farther and the mortgage gets paid off sooner.

But while average mortgage rates continue to rise upward above 7 percent to 8 or 9 percent, a home equity line of credit (HELOC) may make more sense for the borrower. Here’s why:

• It’s a line of credit, like a credit card, but backed by your home value, which allows the lender to charge a much lower interest rate than a credit card.
  
  
• You draw from the line of credit only as needed, unlike a cash-out refinance, where you get one chance to name the amount you want to take out at closing, and the interest starts day one. Some people set up a HELOC just to have on hand should they need access to funds.
  
  
  • For a renovation completed in phases, you could borrow against the HELOC, pay off the balance over a number of months, enjoy the results of phase one, and then embark on phase two when the time is right. The line of credit is there for you during the entire draw period.
    
    
• You can pay a HELOC back more quickly; to pay off a traditional refinanced mortgage without any additional payments toward principle takes the full term of the loan.
  
  
• Just like a credit card, you only pay interest on the balance you carry. Unlike a traditional fixed-rate refinance, the interest rate on a HELOC is variable, and it accrues daily.
  
  
• Closing costs for a HELOC are usually lower than for a refinance, and the whole process is typically much faster.

In addition to funding home-related expenses, you may want to pay off higher-interest credit card balances so each payment you make against that debt goes farther. A HELOC may have a more competitive rate than a traditional car loan, especially for a used vehicle, so if you’re in the market, be sure to compare options.

Whether or not it’s a good idea to take equity out of your home depends on your personal financial situation and ability to pay it back. It’s essential to remember that your home is the collateral for the loan, and you’ll still need to make your usual payments on your primary mortgage. Talk to a trusted financial advisor to help decide what’s right for you.