The thought of a home equity loan (HELOC) or refinance can be a scary thought for many families and individuals in this economy. If you take out the loan will you be able to pay it or will you chance losing your home? For many it can be a good idea because it provides a lower interest rate than credit cards and it can be a way out of medical debt and other surprise bills you may not be prepared to pay.
So the first question many people ask first is:
How do I figure out how much equity I have in my house and how much can I get out of it?
The formula for home equity calculated by the market value of the house minus the current mortgage you have on your home. For example, if your house is appraised for a market value of $300,000.00 and your current mortgage amount is $200,000.00, than the equity you have in your home is $100,000.00.
Depending on the bank you have your mortgage through, you will most likely be able to take out 75-90% of the equity you have in your home.
You can choose to cash out or send part or all of the money to pay bills at the closing.
The next question many homeowners ask is:
What is the difference between a HELOC and a refinance?
Both options are based on borrowing equity from your home.
Both options can also get you a lower interest rate than you are currently paying on bills.
A HELOC is a line of credit and it will be a second payment separate from your mortgage. It can be taken out for a shorter amount of time than your mortgage, such as 5-10 years.
A refinance is added into your mortgage payment and is taken out for the same term as your mortgage.
The next thing to consider is:
Can you afford the payment?
This is the main determination of whether a HELOC is a good idea for you and your family. Make sure to sit down with your finances before you get into a loan like this and determine if doing this will help your finances or hurt them. Taking out a loan like this should not add the stress of possibly losing your home. It should be assistance for getting your head above water or paying off unexpected costs such as medical bills.
As a whole, taking out a HELOC can be a very helpful option as long as you can make the payments and it helps you in the long run. Owning a home can be a very stressful investment, but it can also be a very helpful investment as long as it is done in a smart way.