We’ve spoken a lot about how mortgage rates are increasing as a result of the Federal Interest Rate doing the same thing. Most assume that this trend will have the greatest impact on those who don’t currently own. They’re probably correct, but rising interest rates also have a significant impact on those who already own homes.
Most homeowners will develop equity the longer they stay in the home. Equity essentially refers to the percentage of a home you already own; this includes the principal you’ve already paid off, as well as additional value the property has developed over the years.
You don’t need to wait until you’ve paid off the home to tap into your equity, however. Many people use equity to pay for things like college tuition, or for home improvements. They can leverage their equity to fund a business opportunity. In order to do this, they need to work through their mortgage lender. And this is why increasing rates are spooking people out of using their equity.
Equity is awarded in the form of a loan, and the owner/borrower will pay interest while repaying the loan. Higher interest rates can dissuade potential borrowers, just like it dissuades people from buying a mortgage.
But with a good strategy, you can access your equity at the lowest possible rate, and possibly even come out ahead! It all depends on what method you use to access your equity, which depends heavily on what you plan to use the cash for. Learn more below about each variety and what it’s best for!
Home Equity Loans
A Home Equity Loan is exactly what it sounds like. Your equity is disbursed to you in the form of a cash loan. This is the most simple way to access equity, and—like a mortgage—the interest paid depends directly on what the current rate is. As the rate increases, this form of equity access will become more costly.
That said, The biggest benefit to an HEL is its timeliness. If you need cash as soon as possible, or in one lump sum—for medical costs or other emergency payments—an HEL will probably be your best bet.
Home Equity Line of Credit
A Home Equity Line of Credit (HELOC) is also what it sounds like; a line of credit, similar to a credit card, versus an outright loan. The major difference is that there is a maximum amount that a homeowner can pull from the HELOC during a single month. Therefore users employ HELOCs for long-term projects, such as a remodel or a small business, instead of immediate needs. The term of a HELOC can be as long as 25 years.
Just like a credit card, a HELOC is a much more affordable option for those who use it responsibly (AKA those who pay their bills on time). Interest rates are lower and, unlike an HEL, there are no closing costs.
A Cash-Out Refinance is another option, which allows homeowners to refinance their home for more than it is worth, and use the extra cash for whatever they choose. You would resume making a monthly payment on your home, which would include paying for the additional cash that you took out.
Now, the most common reason homeowners refinance their homes is to lessen their mortgage payments. If your initial mortgage rate was high enough, there’s a chance that you could refinance at a lower rate, and continue making payments similar to what you were already facing—and that’s including the additional cash from equity.
Many factors will impact this, including how much equity you want to borrow on, and your current credit score. Be sure to speak with a qualified lender to find the best way for you to tap into your home’s equity!