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How to Get Cash Out of Your Home

Equity is the portion of your home that you own. For instance, if your home’s value is 150,000 and your mortgage balance is $100,000, then you have $50,000 of equity in your home. Here are the three financing options that will allow you to access those funds.

Cash-out refinance
This option involves replacing your current mortgage with a new mortgage for more than you currently owe and taking the difference as cash. This is a good idea if rates are lower now than when you got your first mortgage, since a lower interest rate could help offset the increase in your loan amount. Cash-out refinance is also a good option if you are planning to stay in your home for long time – because the payments are spread out across so many years, the increase to your monthly payment may not be as great as with the other home equity options.

Home equity loan
Unlike a cash-out refinance, a home equity loan is a second loan in addition to your mortgage. It generally has a higher interest rate than current mortgage rates, but as a separate loan it gives you the flexibility to manage it apart from your mortgage. As with most loans, you get the funds in a lump sum payment. Interest rates and payments are generally fixed for the life of the loan. This is a good option if you need a cash infusion that you plan to pay off fairly quickly.

Home equity line of credit
The most flexible of the home equity options, this is works sort of like a credit card tied to the equity in your home. With a line of credit, you can access the equity in your home as you need it. A great example is home improvement: you could spend $50 of your equity at the home improvement store for paint, or $50,000 of the credit line with the contractor who is building your new addition. Interest rates are usually lower than for home equity loans, but variable (often tied to the “prime” rate – the rate banks charge each other for lending money overnight). You only pay interest on the amount that you withdraw from the line-of-credit and your minimum monthly payment is usually interest-only or a small percentage of the outstanding balance. However, by stretching out payments, you increase the total cost of the loan.

 

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