The dream of homeownership can become a reality, but after a long approval process having to provide income, assets, even letters of explanation for large deposits found on your bank statements, only to have closing delayed for appraisal or title issues. While these are certainly the lows of the mortgage process, it’s no wonder that some say this the most stressful process out there, even worse than buying a car. In the end though, being able to build equity as you continue to pay down the mortgage balance, and with home values rising, you can then have access to these funds without having to put a ‘for sale’ sign on your front lawn.
The Original Home Loan
A typical home mortgage is a loan that is taken out and held in the first lien position, which means if you were to foreclose on your home, the bank would take ownership in order to be paid back. If you are looking to gain access to the equity in your home, a cash-out refinance could be an option for you, spreading out the balance of your original mortgage along with your addition, over the life of the loan, whether that’s 15, 20, or 30 years, now in an entirely new mortgage.
Borrowing Only Your Equity
HELOC’s are a popular way to borrow against the equity that you have built up in your home into a second mortgage. Working much like a credit card, you are given a line amount and you can draw funds as-needing, only paying back the outstanding balance. Many use these lines of credit to consolidate debt, fund a home improvement project, or even use to take a much-needed vacation.
Which Program is Right for Me?
As the mortgage process can get complicated, it’s always important to discuss your options with a mortgage loan officer, and don’t be shy about asking questions. In either loan program, credit, income, and assets are certainly important in order to gain the most favorable terms and interest rate on the market. You can still be granted approval otherwise, just will have to pay more over time. When taking out a new traditional mortgage will have at least more than 20% equity (the current mortgage balance divided by the appraised value will give you the loan-to-value, and you’re typically able to borrow up to 80% LTV). But with the full documentation required to be provided, a full appraisal, and not to mention the closing costs associated with, it may not be worth it.
When it comes to a home equity line of credit, the closing costs are minimal, a drive-by appraisal is typically sufficient, and the closing paperwork is a fraction of the size. If you want the opportunity to have access to funds but only draw as-needed if you are unsure the exact amount you need to borrow at once, then this could be a good option. Since it does work like a credit card you will need discipline to avoid using the cash for unnecessary spending.