There are a few different types of home equity loans. Some may be a better alternative than others based on your situation, interest rates, and the reason for your home equity loan. The Farmington Hills Michigan home equity loan options detailed in this article may help you understand your options.
Home Equity Loan Types
Cash-out Refinance
A cash-out refinance pays off your first loan and creates a new one. The new loan includes the amount of the old loan, the extra funds you are taking out and applicable settlement costs. Because you are replacing the old mortgage, rather than taking out a new one as a second mortgage, the rates may be better than a second mortgage. This is essentially a normal refinance except that you are extracting equity in the home. Those funds are given to you all at once. When reviewing a cash-out refinance, compare the interest of your existing loan with the new one. If your existing rate is higher, then the new lower rate will save you money. Otherwise, you should review other options and preserve your first mortgage rate.
Home Equity Loan
A home equity loan is a second mortgage on top of your first mortgage. With this option, you borrow a specific amount that you pay back over a set number of years, either at a fixed rate or a variable one. Second mortgage rates are traditionally higher than first mortgage rates. Closing costs also still apply.
Home Equity Line of Credit (HELOC)
A home equity line of credit usually has an adjustable interest rate that goes up and down with the prime rate. HELOCs are open-ended, so they are similar to credit cards. The lender sets your maximum credit limit. You can borrow money up to that limit as needed. Your payment reflects the actual balance. As your balance gets paid down, the remaining credit may still be used. Credit limits may be adjusted by the lender in reaction to significant changes in the real estate market.
Ask about annual fees, cancellation fees, and mandatory minimums or withdrawal restrictions. Similar to credit cards, HELOCs can be changed by the lenders at any time. This option may be great if you are unsure about needing the entire loan. However, be aware that the credit limit can be reduced, limiting the total funds available.
Farmington Hills Michigan Home Equity Loan Options
All home equity loans are based on the current market value of your real estate and the balance of current loans. You can estimate your equity by calling a local real estate professional for a market analysis. Lenders will require appraisals to determine a more definitive figure before lending you any money. Think twice before taking more equity than you realistically require. Also ensure that the new mortgage payments fit your budget. All home equity loans use your real estate as a lien, allowing them to foreclose if you can not make payments. This Farmington Hills Michigan home equity loan options is intended as a broad overview. Consult with a local mortgage consultant for current interest rates, closing costs, and other solutions.