Don’t let your new property be a burden for you, make it your asset. Leverage your home equity using smart ways. Your own home provides shelter and a sense of attachment but also, it’s a great investment and can be used as a source of income if you use your home equity in the right way.
Using your house to produce cash can be very convenient instead of using other assets that are taxable because that can generate withdrawal penalties. The process of using your existing home equity is a lot easier and straight forward as compared to getting a new loan because the lender has your home as a security, and you are just getting an additional loan.
Home equity is the amount of mortgage that you have paid and the amount of property you own. It is actually the difference between the value of your property and the loan you are left with. If your home is worth $250,000 and you are left with a mortgage of $150,000, your home equity will be $100,000.
When you apply for home equity, your house is used as a security for the loan and becomes collateral. In this case, the interest applied is lowered as compared to a credit card loan. If you don’t make the payment at a specific time, you will eventually lose your home. The risk of losing your home can be eliminated if you make the right choices and use the money smartly and carefully.
Usually, lenders set a limit of eighty percent of the home equity that you can use because the extra twenty percent protects them from fluctuations in property prices. LTV is the loan to value ratio used by lenders to calculate the amount you can leverage for your home equity. LTV also defines if you qualify for a loan or not using your home as collateral. It’s always a great idea to consult a qualified counselor for help in making your decision.
Types of Home loans
There are three ways that can be used to get a loan for your home equity, and you must decide wisely which one you will be using. They include Home equity loans, HELOCs and cash-out refinance. Let’s have a look at all of them,
Home equity loan
In a fixed-term home equity loan, the mortgagor gets the static amount is a single payment and the period for amortization of the payment is set, like 15 years. After issuing the amount, it cannot be withdrawn any further. This loan is similar to a primary mortgage and every payment is divided between interest and principal. A home equity loan is best for users who are in immediate need of the entire amount.
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HELOC (Home Equity Line of Credit)
HELOC is a flexible loan and it can be issued without any funds other than some lines that require a minimum amount to start. It works just like a credit card and you can withdraw this credit at the time of need. You can amortize the payment in the future because of the assembling of this loan but only the amount that has been drawn can be used to make payments. Usually, there is no closing cost for HELOCs. This is good for users who want to take care of their expenses on an ongoing basis.
This method does not include a second loan, rather the user refinances a bigger amount. Cash-out refinances sometimes charges a higher closing cost than the other two alternatives. This loan is best for users who qualify for a better mortgage rate for a second loan after they have collected considerable home equity for the first one.
Here is a result of a research showing what do people do with their second debt, 49% of people use it to renovate their houses, 22% of borrowers spend it on debt consolidation, 19% of people make their monthly expenses from this debt, 19% use it to buy a vehicle, and 13% of them go on a vacation with this debt. 36% of the borrowers use it most efficiently, by paying their other debts and keeping only one that has the least interest rate.
Ideas to Leverage Your Home Equity
Here are some ideas for you to manage the money smartly when leveraging your home equity,
1. Renovate Your Home
This can be a wise investment for your second debt if you are planning to sell your house any time soon. The right renovations can make a huge difference in the value of your home so spend your money wisely and let it be your asset.
2. Purchase Stocks
Buying stocks is a risky option but if it works, it proves to be the best investment. Some stocks come with more risk than others do, depending upon the financial trends, market, and reputation of the company you are buying stocks from. You must compare the return you will get from stock and the cost you will be paying for receiving the debt to lessen the risk.
3. Setup a New Business
To start a business, the most economical way is to borrow money by keeping your house as collateral. In this way, you get the least interest rates. The mistake that many industrialists make is to put their business-related expenses on their credit cards.
4. Complete Your Education
Unlike all the assets like houses and bank balance, nobody can ever take away your education. Think upon it and make the right decision, see if it will help you in the long run or not. Choose the option that suits you perfectly, in all ways.
5. Invest in More Property
You already own a home to live, what will be better than getting a commercial or residential property that you can rent out and get a monthly income. Let it be your asset, so you don’t have to worry about your monthly expenses.
All the options come with risk but on the other hand, you can get a lot of benefits so make a wise decision and use your home equity in the best way possible.
By using a mortgage agent or mortgage broker from Citadel Mortgages, you will be able to ask all the questions you have and be ensured you get the best advice and mortgage product for your mortgage needs. Contact Citadel Mortgages to become mortgage and debt-free sooner!
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