Can I Qualify to take cash out of my home?
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If you're looking to tap into your home's equity, you have a couple ways to do it. In making your choice, you'll want to consider:
➢ How much equity you want to tap;
➢ How you want to use the money; and
➢ The interest rate of your existing mortgage, if you have one.
Whatever your choice, keep in mind that Texas limits the loan amount of a home equity loan to 80% of your home's value. If you have an existing mortgage, this 80% includes the current balance of that mortgage, so to figure out the maximum amount of cash you can get, multiply your estimated value by 80% and subtract the balance of your existing mortgage.
Option 1 is to refinance your existing mortgage with a home equity first mortgage. The new loan amount is the amount needed to pay off your existing mortgage plus the amount of cash you want to take out.
The biggest advantage of this option is that interest rates are still low. For many folks, they may be able to get a lower fixed rate on a home equity refinance than their current mortgage rate. And because a home equity loan must be no more than 80% of your home's value, the loan will not have mortgage insurance, and most folks can choose whether or not they want to escrow for property taxes and insurance. Some folks like that added flexibility.
The biggest disadvantage is that home equity closing costs are higher than standard closing costs, particularly the title policy fees. Of course, you can pay the closing costs using the cash you take out, but you're still paying them.
A second option is leaving your existing first mortgage in place and taking out a home equity second mortgage. Home equity seconds come as fixed-rate term loans and as adjustable-rate lines of credit (also called HELOCs).
A home equity second mortgage is particularly appealing if you already have a very low rate on your existing first mortgage. Even though the second mortgage rate will be higher, typically 1% to 3% higher than first mortgage rates, it only applies to the second mortgage balance.
Another advantage of home equity seconds is lower closing costs. Although most lenders do charge some fees to process the loan, it's usually no more than about $1000.
I've already mentioned the biggest disadvantage - the interest rate. It's possible your total mortgage payment - which includes your current first mortgage payment plus the home equity payment - will exceed the payment if you use the first option - a home equity first mortgage - even if your current mortgage rate is super low. To find out, compare the options using the Home Equity calculator on our Website (or give us a call).
In addition, HELOCs have adjustable rates. That hasn't been an issue for the last couple years, but with the specter of higher inflation looming, HELOC rates could rise quickly.
And, second mortgages typically have a maximum term of 20 years. A home equity first mortgage can have any term between 8 and 30 years. Using a 30-year term may allow you to keep your new mortgage payment after taking cash out no greater than what you're paying right now.