Consumers are no stranger to the current economic times we live in, as everything is up and inflation is rampant virtually everywhere. Gasoline prices, stock prices, house prices, mortgage rates, the list goes on. As costs rise, so does the need to borrow money for people in special situations.
If you are considering doing a cash refinance to combine consumer debt, do home renovations, buy another property, or need cash for any reason; here are ways to get and safely access your home equity.
1. Cash in on your first mortgage refinance. This could mean having to give up your 30-year 2.75% fixed rate mortgage. You are paying off those consumer debts and acknowledging that it is possible to access your first mortgage money. This means having to take the 30-year fixed rate mortgage in effect today, which currently sits at around 4%. A few advantages are that the payment is fixed, deductible and scalable for the future.
2. A home equity line of credit is like a credit card tied to your house that also has a high rate. We are currently in an inflationary environment and this situation could last through the rest of 2022. As a result, the Federal Reserve is raising the federal funds rate plus a margin of 3% of the prime rate. The prime rate usually includes a margin. This is the prime rate plus a spread with your home equity line of credit, which means it’s realistic to expect your current home equity line of credit or a new one is going to have a future rate and subsequent future payment increases. Payment increases on a home equity line of credit with balance are realistic. The advantage of a home equity line of credit is that it is very inexpensive to obtain and you only borrow against what you pay, which means you only borrow against the balance of the equivalent to the mortgage, so that there is no balance. It works the same way as a credit card. However, costs and margins, which are the bank’s profit motive, are likely to increase as costs increase. It would not be uncommon to think that interest rates on the mortgage line of credit could reach 6 to 7% over the next few months.
3. A second fixed rate mortgage, which is a hybrid between a fixed rate mortgage and a home equity line of credit; it is still not deductible like the home equity line of credit. However, it is a fixed payment on a 30 year loan or a 10 year loan. The only advantage of this type of product is that it is a fixed rate payment, however, because it is second on your home, just like the home equity line of credit, it will also have a higher interest rate more than likely. somewhere around 6.5-7.5 percent.
With these three options, which one is best for you financially? A line of credit might be a good decision, but if you need to borrow a large amount of money from your home equity line of credit to pay off debt or complete a home improvement project, a smart idea would be to repay this home equity line of credit. credit. However, most diligent families today do not have this ability to spend. Entering a fixed rate mortgage on a new first mortgage even though the rate may be higher could provide immediate relief from the fixed rate payment to achieve the goal, whether it is to fix the house or repay the debt. It might not be a bad idea to consider getting a first mortgage instead of a home equity line of credit because it’s also tax deductible and, as we mentioned, it’s also scalable. It would be quite easy for you to refinance this loan and do what is called a “rate and term refinance” which will give you a better interest rate and better terms than a withdrawal and again take advantage of the rates on the whole line.
In other words, you could access money for a retirement plan or a debt consolidation plan and then refinance that loan in the future when rates drop. It also might not be a bad idea to consider the possibility of a more aggressive debt repayment structure. You can cash in on refinancing all of your debt into a 30-year mortgage or a 15-year mortgage, which could give you a faster repayment time and drastically change your financial situation for the better. A good mortgage lender who can clearly and accurately articulate the pros and cons of each of the three products above. This would be a good first step in deciding what might help you in your decision-making process to tap into the equity in your home, regardless of your financial goals.
Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes, vacation homes and investment properties. Learn more at www.sonomacountymortgages.com.