Our goal at Credible Operations, Inc., NMLS Number 1681276, hereafter referred to as “Credible”, is to give you the tools and confidence you need to improve your finances. Although we promote the products of our partner lenders who pay us for our services, all opinions are our own.
Dear Credible Money Coach,
I recently lost my job, but I have a decent income from social security that covers my mortgage. My HOA took an assessment of $8,300 for the new roofs. I need a home equity loan. My property will be valued at $245,000. I owe $80,000. —Jacqueline
Hello Jacqueline and thank you for your question. Doing home repairs or improvements is a good reason to tap into the equity in your home. Home equity loan interest rates are generally lower than other loans you might consider for a home project, such as a Personal loan.
Let’s take a look at how your home equity works and some ways to access it, including through refinancing.
Whichever method you use to access the equity in your homethe first question you need to ask yourself is whether you have enough net worth to qualify.
Generally, lenders won’t allow you to borrow more than 80% of the value of your home, although there are exceptions, such as VA loans. This means that if your home is valued at $245,000, the maximum you could borrow (including your mortgage and home equity loans) is $196,000 ($245,000 x 0.80).
Since you have an $80,000 mortgage, you have $116,000 ($196,000 – $80,000) of principal remaining. So you have more than enough to qualify for a home equity loan if that’s how you choose to pay the roof appraisal. But you also have other home equity borrowing options.
Ways to access the equity in your home
Tapping into the equity in your home can be a relatively inexpensive way to get cash when you need it. However, since you’re putting your house up as collateral, it’s wise to only spend your capital on necessities. Paying for an HOA appraisal is a good use of equity, as it will likely increase the value of your home.
You have several options for accessing your capital, including a home equity loan, home equity line of credit (HELOC), and cash refinance.
Home Equity Loan
A home equity loan is also known as a second mortgage. Like your first mortgage, your home secures a second mortgage. You will generally need good credit and a low debt-to-equity ratio to qualify.
Interest rates are generally higher for home equity loans because the lender assumes a higher risk. If you defaulted and your first mortgage lender foreclosed on your home, the second mortgage company might not get paid.
A home equity loan can be a good choice when you know exactly how much you need to borrow.
Home equity line of credit
A HELOC is another way to leverage the equity in your home. It’s secured by your home, but works more like a credit card than a mortgage. Instead of receiving a lump sum and paying it off in installments over time, you’re given a credit limit to draw on for a set “drawdown period” and then start paying off your balance.
With a HELOC, you only pay interest on the amount borrowed, not on the total amount available. Home equity lines of credit usually have variable interest rates rather than fixed rates like a mortgage. This means that your interest charges and monthly payments may change over time.
You can choose a HELOC if you are unsure of the amount you need and want the flexibility to borrow as little or as much as your approved limit.
Refinancing by collection
A cash refinance replaces your current mortgage with a new one for a higher amount, so you pocket the difference. This is a good option if refinancing gets you a lower interest rate. You can also extend your repayment term to lower your mortgage payment. Remember that this strategy means that you will pay more interest during the new life of the loan.
One last word…
Each option I’ve covered comes with closing costs in addition to interest charges, such as loan origination, underwriting, valuation, and other administrative fees.
Tapping into the equity in your home can be a smart way to pay for necessary repairs like a new roof. Just make sure you fully understand all terms, conditions and costs before borrowing against your home equity.
And it’s a good idea to compare mortgage refinance rates from several lenders. You can easily do that with Credible.