If you stay in Texas, you must know that the US experienced an all-time high in equity borrowing potential in the mid-quarter of 2020. The number was as high as $6.6 trillion. It allows you as a homeowner to get a home equity loan, or cash-out refinance. But is cash-out refinance a good choice for you?
Before you apply for a home equity loan or cash-out refinance, we want you to be equipped with knowledge. When you learn how to get equity out of your home, you will be able to make an informed decision and decide which option is right for you.
The Right Way To Calculate The Equity You Have In Your Home
Your home equity is the difference amount between the assessed value of your home and the amount you still owe on your mortgage. In Layman’s terms, equity means the amount of your home you actually own. For example, if your home is valued at $100,000 and you owe $80,000, you have $20,000 of equity in your home. And the rest part at the mortgage balance is still owned by the bank.
If the price of your home has increased after you bought it, or if you have paid down a significant amount of your mortgage, a new loan or a refinance will always be beneficial for you. With a high amount of home equity, you will get more options for financing. As per the regulations, a borrower must have at least 20% equity in their homes during cash-out refinance application.
How To Take Equity Out Of Your House?
There are a few ways if you want to take equity out of your home. Home equity loans and cash-out refinances are the most common ways. We will tell you about the benefits of both.
1. Home Equity Loan
The home equity loan is borrowing a fixed amount at a fixed interest rate. You can call it a second mortgage which you need to repay over a set period. A home equity loan works similarly to your first mortgage. Still, the interest rate can be slightly higher than the first mortgage.
2. Cash-Out Refinance
Cash-out refinances, or mortgage refinances where the borrower takes the difference in cash. Homeowners generally prefer cash-out refinancing during the remodeling of their houses. Cash-out refinancing allows you to take a short-term construction loan and then use the money to repay the construction costs. The closing costs of cash-out refinancing can be high in some cases as the homeowners might have less security of their homes than before.
Benefits of Taking Out Equity Out Of Your Home
One of the many benefits of taking equity out of your home is you can access a significant amount of money that comes at a far lower interest rate than personal loans and credit cards. During home renovations or other expenditures, where you need to cover significant expenses, your home equity can work as a real savior.
If you consider taking out your home equity to be one of the cheapest options, you are not wrong. Another benefit of accessing your money this way is the interest you pay on a loan may be tax-deductible. If you use the money to improve your home, the deduction will be available.
How To Increase Your Home Equity?
There are a few ways to increase your home equity:
1. Paying Off The Mortgage
This is one of the most effective ways to increase your home equity if you can afford to pay off your outstanding mortgage faster than likely. Try making larger monthly payments if you want to avoid paying the entire remaining mortgage in full. It will help you build your home equity faster, and you can save the amount you might need paying for the interest. But before paying off your mortgage, make sure to check with your lender if there is any penalty for paying your mortgage off early.
2. Increase Your Home Value
Another great way to increase your home equity is to increase the value of your property. If you invest in remodeling your house, install solar panels, or invest in landscaping, your home will increase value. But before you spend on remodeling your home, make sure that your improvement gives a high return on investment. Remodeling your kitchen, replacing the roof, and investing in the backyard are some of the great ways to increase your property value.
3. Try Refinancing
If your financial condition allows you to make higher monthly mortgage payments, you can refinance your home to a shorter-term loan. For example, if your current loan has a 30-year mortgage, switch to a 15-year mortgage so that you can pay off your mortgage sooner and build your home equity. But always remember that you might need to pay larger monthly payments for shorter loans. Always check your affordability before refinancing.
If you consider borrowing equity from your home, the first step is to count how much your home is worth. Always create a plan addressing why you want to take equity out of your house and when you will pay back before acquiring the money. Talk to a professional to understand if cash-out refinance in Texas is the best option for you.