More homeowners are fast becoming aware of the many ways that they can make their home equity work for them. We’ve talked in the past about how you can pay for a home renovation or consolidate debt by using the equity you’ve built up in your home. The question is, what is the best way to tap into your home equity? Should you refinance? Get a HELOC? Or should you apply for a second mortgage?
Each of the above has its own set of advantages and disadvantages. A HELOC would be great for someone who is not yet sure how much he or she needs. For someone with a concrete plan in place, getting a lump sum via a second mortgage or a refinance may sound great. What could be the best option for you? Let’s take a closer look below.
A HELOC allows you to tap into a line of credit as needed, with the limit set to up to 65% of your home’s value. Interest-only payments can be negotiated with your lender and the fees are minimal if not nonexistent. HELOCs are also available for those who’ve garnered at least 20% of their home’s value in equity. The downside is that HELOCs tend to be kinder to people with a good credit score; however, there are private lenders who may consider those with bad credit too. As mentioned earlier, a HELOC is the smart choice if you’re expecting big expenses but not sure yet when and how much money you’ll need because it offers flexibility.
Refinancing one’s mortgage is a good choice when one is sure of how much money is needed. A mortgage refinance can allow a homeowner to tap as much as 80% of the home’s value and can be given to someone who has at least 20% equity in his or her property. Interest may be fixed rate or variable rate. A downside is that you’ll be charged interest on the entire value whether you actually use the funds or not. Another downside is having to pay prepayment penalties that can go up as high as 3 months of interest. Note that monthly payments are often easier to manage for a refinance because they usually have a set value.
People who do not qualify or got turned down for a refinance or a HELOC often have better luck applying for a second mortgage. A second mortgage is friendlier to those who don’t have substantial home equity and have a less than desirable credit score. Cons for a second mortgage include having to pay quite a number of fees such as lender’s self-insured fees, legal fees, appraisal fees, and mortgage fees. This makes a second mortgage less attractive for potential borrowers but even so, if you’re someone who’s truly in need of money, a second mortgage is your best bet.