- Large loans: The equity in your home can amount to tens (or hundreds) of thousands of dollars, so it’s an easy route to a significant amount of money.
- Relatively low rates: Because your home secures the loan, you enjoy relatively low interest rates (compared to credit cards and personal loans).
- Potential tax benefits: The tax benefits aren’t as generous as they used to be. But if you use the funds for “substantial improvements” to your home, you may get a tax break that effectively reduces your loan cost. Ask your accountant for details.
- Long repayment period: By replacing your existing mortgage with a brand-new 30-year or 15-year loan, you can stretch out your payments. But that comes at a cost.
- Interest costs: You’ll restart the clock on all of your housing debt, so you’ll increase your lifetime interest costs (borrowing more also does that). To see how this affects you, check the amortization tables on your existing loan and the new loan. The way around this is to use a second mortgage instead.
- Risk of foreclosure: If you’re unable to repay your loan, you could lose your home. Unsecured loans are far less risky.
- Closing costs: Mortgage loans require high up-front closing costs. You always pay those costs whether you roll them into your loan balance, write payday loans in Fremont a check, or take a higher rate. To close your loan, you’ll spend between several hundred and several thousand dollars, and you need to add that amount to the costs of wherever you’re spending the money.
Alternative Ways to Get Money
Personal loans: You can avoid adding to your home-related debt by using unsecured loans like signature loans from banks, credit unions, and online lenders. If you have good credit, you might even be able to fund small projects with credit card promotional offers-just pay off the debt before those toxic double-digit rates kick in.
Second mortgages: Instead of replacing your existing home loan, you can add a home equity loan or line of credit (HELOC) to borrow against your home. That approach lets you leave your existing loan untouched-so your interest rate, amortization schedule, and monthly payment remain the same. A second mortgage may come with a variable interest rate, but once you pay it off, you’ll be back where you are today as if you never borrowed.
Specialized loans: Depending on why you want to borrow, a particular type of loan may be a better option than taking cash out of your home. For example:
- Student loans are designed for education needs, and federal loans have borrower-friendly features.
- Small business loans may be available with backing from the U.S. Small Business Administration (SBA), resulting in relatively ?low-interest rates.?
Reverse mortgages: Homeowners over age 62 can take retirement income or lump-sum payments by using a reverse mortgage. You don’t need to make monthly payments, but you’ll need to sell the house or pay off the loan when the last borrower moves out of the home.
Getting Approved
Equity: Using a cash-out refinance loan will reduce your equity, so you need sufficient equity in your home to qualify. In other words, your home needs to be worth more than you owe on your mortgage. Most lenders are hesitant to lend more than 80% of your home’s s like VA and FHA allow you to borrow more. Just remember that the more you borrow, the more your risk and borrowing costs increase.
Income: Lenders need to verify that you have enough income to afford the new monthly payments on your loan. Those payments might increase as you borrow more, so check your debt-to-income ratios to see if you’ll be in the right range.
