A home is an investment. Most of us know this. But homes are illiquid, which means it’s difficult to convert the value of your home into spendable money. This value, called home equity, can be accessed in a number of ways. The following five methods are commonly used to access home equity.
1. Sell the home. If you own a home that’s worth $230,000 and you sell it in order to purchase a home worth $200,000, that extra $30,000 is yours to keep. Literally, that $30,000 is home equity that has been transformed into cash through the home sale. Unfortunately, many homeowners aren’t able to downgrade to cheaper homes, especially if they have growing children. Selling the home is not always the best option.
2. Refinance. With a cash-out refinance, you simply obtain a new mortgage on your home that is greater than the remaining balance on the current mortgage. The excess is provided to you as spendable cash. Cash-out refinancing is one of the best ways to access your home equity, provided the value of your home has increased and you have a good credit score. Since a refinance is a new mortgage, you’ll want to put the same research and effort into finding the best mortgage rates that you would if you were pursuing a home purchase mortgage.
3. Take out a second mortgage. If you have equity in your home, you can access it by taking out an additional mortgage. This is similar to a refinance, but the loan that pulls out the equity as cash is separate from the primary home loan. Second mortgages often don’t come with the best interest rates.
4. Take out a home equity line of credit or a home equity loan. This is the most basic way to tap into your home equity. This is like taking out a second mortgage, only it’s simpler. Home equity lines of credit are accessible in small increments but often have high interest rates.
5. Take out a reverse mortgage. This option is only available to some homeowners and it’s an expensive option, but it is an option. A reverse mortgage pays the value of the home back to the owner in monthly increments over the years. Reverse mortgages are only available to seniors. Ultimately the home is owned by the bank when all is said and done.
If you plan to access your home equity and use it as spending money, one of these options is sure to meet your needs. Talk with your local lender to determine what suits you best.
