If you own a home, you would have come across the term Home Equity, and like most homeowners, you’re keen to find out how you can benefit from this valuable asset.
Home Equity is the portion of your property’s value that you own outright; in other words, it’s the portion of your property that you’ve paid off. This is determined by the difference between your property’s market value and the current balance of your mortgage. However, note that Home Equity can also fluctuate if you’ve made any improvements on your property or if the market value has risen or fallen.
Home Equity is often said to be a homeowner’s most valuable asset because it can be used to fund future projects or investments. If you’ve owned your home for a few years, there’s a good chance you’ve built up some reasonable Home Equity. So what’s next?
There are new opportunities for you to make new purchases or investments if you use your Home Equity responsibly. For example, Home Equity can help you get fast access to a loan with lower interest rates to fund a renovation or purchase an investment property.
Below is a list of options on how you can take advantage of your Home Equity:
Equity Home Loan
An Equity Home Loan is similar to your original mortgage. However, the lender uses the equity in your home as collateral. Usually, you can borrow up to 80-90% of your home’s value but keep in mind that the interest rate on an Equity Home Loan is often higher than the interest rate on your original mortgage but lower than the rate on a personal loan. Therefore, an Equity Home loan is often used to fund lump-sum payments such as large medical bills or educational expenses.
What are the benefits of an Equity Home Loan?
- Access to a large amount of money when required.
- Lower interest rates compared with other loans, e.g. personal loans.
- Money used for renovation can increase the property’s value.
- The loan can be used as a deposit to buy a second property.
- The interest can be tax-deductible for investors.
What are the risks of an Equity Home Loan?
- An increase in the amount of debt owed.
- It will take longer to repay the original home loan.
- Larger repayment amounts.
- Potentially higher interest rates.
- Risk of losing the property if you are unable to make repayments.
Home Equity Line of Credit (HELOC)
HELOCs are secured lines of credit, backed up by the equity in your home. This is a more flexible option, which works like a credit card where you only draw funds from your HELOC when required. There is also an option to pay monthly interests only on the amount you have drawn, making HELOCs one of the most affordable types of loan.
HELOCs works well if you periodically need cash over a long period as it can be topped up and redrawn on repeatedly without additional fees, as long as the interest is paid on time. It is also a good option if you want to fund some home improvement projects or start a small business.
What are the benefits of a HELOC?
- Easier to obtain and has lower interest rates than other types of loans and credit cards.
- The funds can be withdrawn easily via cheque or an ATM card linked to the loan. Some lenders will accept withdrawals through an online banking system or a telephone banking system.
- Extra repayments on the loan can be made at any time, which can help reduce the amount of interest paid over the life of the loan.
What are the risks of a HELOC?
- Risk of losing the property if you are unable to make repayments according to the terms of the contract.
- Reduces the value of your house and therefore reduces your Home Equity.
- Higher interest rate than a standard principal & interest home loan.
Cash-Out Refinance
The Cash-Out Refinance option does not involve an additional loan. This is where you refinance your home and take out a new home loan that is worth more than your original mortgage, usually at a lower interest rate or for a shorter loan term, or both. You will then use the new home loan to pay off your original mortgage, and use the remaining cash for home improvements, debt consolidation or other financial needs.
What are the benefits of Cash-Out Refinance?
- Can potentially lower your interest rate if you had initially purchased your home with a high-interest rate.
- Use the remaining cash to pay off high-interest credit cards which could save you thousands of dollars in interest.
- Use the remaining cash for home renovation that will increase your Home Equity.
- Use the remaining cash for educational investment if you are confident that it will help you earn more money in the future.
What are the risks of Cash-Out Refinance?
- You will have to pay the lender’s mortgage insurance fee if you borrow more than 80% of your home’s value.
- If you choose to use the remaining cash for debt consolidation, you might lengthen the terms of your loan.
- You might be tempted to use your Home Equity for risky projects such as starting a new business.
- A Cash-Out Refinance will come with additional fees.
The three options above provide excellent opportunities for you to take advantage of your Home Equity but keep in mind that these come with various risks that should be carefully considered.
Therefore, it’s best to seek expert advice and the team at FutureNow Finance are here to help. We can help assess your current financial position and future goals and guide you through the best options available to you. Give us a call on 1300 013 730 or email hello@futurenowfinance.com.au.