Should You Tap Your Home Equity?

With so much equity and still relatively low rates, it might be the perfect time to pull out some money for that kitchen remodel you’ve been dreaming about, for seed money for your business idea, or even to pay off student loans or other high-interest debt.

A cash-out refinance could help with any of these plans. First you need to calculate how much equity you have. Subtract how much you still owe on your mortgage from the most current estimate of your home’s value. (This has probably gone up since you bought it.) Most mortgage lenders will allow you to tap only a portion of your equity. They want you to still have at least 20% equity left in your home after your refinance. For example, if your home is now worth $350,000 and you only owe $200,000 on your mortgage, you would be eligible to borrow up to $80,000 in equity.

Before you run to your mortgage lender, however, remember that every home loan requires costs and fees. You need to make sure that a new loan is worth the upfront cash you’ll have to pay. Closing costs can range from 2% to 5% of the loan total, so if you take out a new mortgage for $280,000 you could end up paying between $5,000 and $14,000 just to make the loan. Those can sometimes be rolled into the loan balance, but you are still responsible for them one way or another.

There may be other situations where a cash-out refi is not a good choice for you. You may not want to tap your equity with a cash-out refi if your interest rate is already lower than the going rates today. Many people capitalized on rates near 2.5% at the end of 2020 and it may not make sense to pay more for a new mortgage. In this case, borrowers may be better off opting for a home equity loan or a home equity line of credit. These are secondary loans that use the equity but do not affect the interest rate of your main mortgage. You could borrow what you need and pay it off as quickly as possible to minimize interest fees.

If you crunch the numbers, however, and a cash-out refinance works well financially, the good news is that interest rates are lower on mortgage loans than on almost any type of loan and your equity is likely to keep rising over time. Give us a call today, a quick chat with us could help you figure out if a cash-out refi is right for you.

To learn more about HELOC's, watch my videos below:

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