Refinancing your home to take advantage of the equity built up in it can provide you with a lot of benefits, but it’s vital that you use the best method. Understanding the benefits and drawbacks of each refinancing option is critical to improving your credit, staying in your home, and being able to save for the future.
Here, we take a look at some common methods for getting equity out of your home, and compare them to SKYDAN’s Home Equity Program, one of the leading alternative ways to get equity out of your home.
Cash-Out Refinancing
Cash-out refinancing is one of the most common ways to get equity out of your home. Many homeowners pursue this type of refinancing after they’ve improved their credit score in order to lower their monthly expenses. Not only does cash-out refinancing make it a bit easier to balance monthly bills and set aside money over time, it also unlocks valuable equity within your home. Let’s take a closer look at how it works:
How Cash-Out Refinancing Works
Cash-out refinancing allows you to access the equity you have built up during the time you’ve been paying off your mortgage. For example, if your home’s value is appraised at $250,000 and you have a mortgage with a balance of $100,000, you have $150,000 built up in home equity.
A cash-out refinance allows you to access that $150,000 in equity. It isn’t a new mortgage; it’s simply updating your current loan, like with a rate and term refinance.
Benefits and Drawbacks of Refinancing
For some, refinancing is a great option. It can reduce your monthly payments, minimize the amount of interest your mortgage is accruing, or give you access to cash to make improvements to your home or pay off high-interest debt elsewhere.
However, refinancing won’t be an option for everyone. It typically requires a ‘good’ FICO credit score of 670 or above, which may make you ineligible if you don’t meet those requirements. Additionally, cash-out refinancing frequently increases your interest rate, which can make it a costly decision in the long term.
Home Equity Line of Credit
A home equity line of credit (HELOC) is a line of credit that’s secured against your home. You can think of it like a secured credit card, but instead of using an initial lump sum to secure the credit line, you’re using your house. The credit is derived from the equity that’s built up in your home, so depending on how much of your initial mortgage you’ve paid off, you could be eligible for a significant home equity line of credit.
Unlike refinancing or a second mortgage, a HELOC doesn’t pay in a lump sum. Instead, you use it like a credit card, using as much or as little as you need.
Benefits and Drawbacks of a HELOC
One of the main advantages of a home equity line of credit is that the interest rate you receive will be lower than other types of refinancing. This is because the line of credit is secured against your home—which leads us directly to the main drawback to a HELOC: if you default on your payments, the bank or creditor could go after your home for compensation.
There also may be fees for not using the account and requirements for making initial withdrawals from the account. Finally, most home equity lines of credit have a variable interest rate, meaning your monthly payments may increase as interest rates change.
Second Mortgage (Home Equity Loan)
A second mortgage or home equity loan (distinct from a home equity line of credit) allows you to take out a loan against the equity you have in your home. For example, let’s say that your home’s value is appraised at $250,000 and you have a mortgage with a balance of $100,000. In this case, you have $150,000 built up in home equity. Most home equity loans limit you to around 80% of the home’s equity, so you’d be eligible to receive $120,000 in this example.
Sounding familiar? Initially, a second mortgage might sound a lot like cash-out refinancing, but recall that cash-out refinancing simply changes your existing mortgage. A second mortgage actually adds an additional mortgage to the mix.
Benefits and Drawbacks of Second Mortgages or Home Equity Loans
One of the main reasons you might choose to take out a second mortgage is because it allows you to maintain favorable conditions in your initial mortgage, such as a low interest rate and lower monthly payments. Additionally, you might be able to receive a higher lump-sum payment from a second mortgage. However, second mortgages are by no means a risk-free endeavor.
If you were to default, your first mortgage would take priority when it comes to recovering losses. This puts the creditor who’s providing a second mortgage at risk. To compensate for that risk, second mortgages typically come with high interest rates which can be damaging in the long run.
HELOC and Home Equity Loan Alternatives
Refinancing and home equity loans are two popular ways to get access to financing quickly by leveraging your home’s equity, but there are some clear drawbacks to these methods.
First, solutions like refinancing require you to go through a FICO-based credit approval process. For individuals who have had significant medical expenses or other unavoidable life circumstances that have forced them into debt, these kinds of credit may be out of reach.
Secondly, a second mortgage or a HELOC can ultimately damage your credit score by increasing your debt-income ratio, your credit utilization ratio, and the overall amount of debt you carry. For people who are seeking to escape debt, these aren’t viable solutions to their financial troubles.
So, are there alternatives? Well, with traditional banks, you won’t find many solutions other than these four options, but there is an alternative that’s growing in popularity: SKYDAN’s Home Equity Program.
How SKYDAN’s Home Equity Program Works
With SKYDAN’s Home Equity Program, you’ll experience an alternative to home equity loans, refinancing, and HELOC. Here’s how it works:
- SKYDAN buys your house and you receive a lump-sum cash payment. Despite having sold your home, you don’t move out.
- Instead of moving out, you lease your home from SKYDAN for a mutually-agreed-upon amount for no longer than two years. (Good news: Your rent is deferred to the end of the agreement, so you have no monthly payment!)
- Finally, at the end of the agreement, you can either purchase your home back at SKYDAN’s original purchase price (plus the deferred rent amount), OR you can sell the property, receiving the additional equity.
Benefits and Drawbacks of SKYDAN’s Home Equity Program
The Home Equity Program is unique in that it can actually help you improve your credit score. With the cash payment you receive from SKYDAN, you can consolidate and pay off existing debts while avoiding predatory interest. Additionally, with two years of deferred lease payments, you have no risk of defaulting on your mortgage, falling into foreclosure, or losing your home.
The only catch is that you must have equity built up in your home; however, that’s the only catch. Bad credit or no credit, job loss, high debt—these factors which would typically prevent you from accessing a traditional bank loan or second mortgage won’t influence your eligibility for SKYDAN’s Home Equity Program.
Ready to learn more? Contact SKYDAN today to confirm your eligibility.