As the COVID-19, or coronavirus, pandemic continues to impact almost every aspect of our lives, it can leave us with many feelings of uncertainty. We may be worried about our health, our family and friends, our jobs and our finances.
Though the United States federal government has issued stimulus checks to taxpayers to help offset the economic impact, many Americans remain particularly concerned about finances. According to a survey by the Kaiser Family Foundation, 39% of Americans had either lost their jobs or lost income due to COVID-19 by the end of March.
During these uncertain times, you may be in a position where you could use a little extra cash. And you’re not alone. Whether it’s to help cover everyday expenses or undertake a home improvement project, there are several ways to get the cash you need.
If you’re a homeowner, you have a couple of particular options available to you: a cash-out refinance or a Home Equity Line of Credit (HELOC). In both cases, you’re essentially converting your home equity into cash.
Keep reading to find out more about refinancing and HELOCs.
Cash-Out Refinance
When it comes to refinancing your mortgage, it can be done in a few different ways depending on your desired outcome. If you simply want to get a lower interest rate, renegotiate the life of the loan or obtain terms that are more favorable to you as the borrower, you may opt for a “rate-and-term” refinance. Since interest rates frequently change, it can be a good option to save some money.
However, there’s another option for refinancing if you have slightly different goals. If you need extra funds – for an emergency, home renovations or to pay off debts – you can also consider a cash-out refinance.
Cash-out refinancing is a way to convert your home equity into cash through the refinancing process. By taking out a mortgage for a larger amount than the previously existing loan amount, the difference is paid out to the homeowner in cash.
Unlike a rate-and-term refinance, the new mortgage may have a higher interest rate rather than a lower one because your new loan amount is higher, though this isn’t always the case. Cash-out loans also come with tougher terms for the borrower, as the lender takes on the greater risk. However, the terms of the cash-out refinance agreement will vary based on factors such as the amount of equity you’ve built up and your credit score.
Here’s an example of how a cash-out refinance would work. Let’s say your original mortgage amount was $200,000. After a certain amount of time, you’ve paid off $100,000 – which built your home equity – and you still owe $100,000.
With a cash-out refinance, you refinance your mortgage to a new, $150,000 loan amount. The $100,000 balance is what you still owe on your home, but that $50,000 amount gets paid out to you in cash.
Cash-out refinancing has become especially popular in the U.S. during recent years. According to Freddie Mac, which conducts studies on refinancing trends, cash-out borrowers made up 83% off all refinance loans in Q4 of 2018, the highest peak since 2007.
Why is cash-out refinancing so popular? First of all, the money – that cash difference between the two loan amounts – is tax-free because it’s not considered income. Additionally, in some cases you may be able to obtain a lower interest rate than what you were previously paying on your mortgage.
If you’re planning to make home repairs with your cash-out, you may be able to deduct the mortgage interest from your taxes. And compared to other types of financing – such as a home equity loan (which is different from a home equity line of credit) it may be a more affordable option.
Home Equity Line of Credit (HELOC)
Similar to cash-out refinancing, a home equity line of credit is a way to use your home equity to get the funds you need. With a HELOC, the equity of your home serves as collateral. In return, you receive a revolving line of credit that functions much like a credit card.
Homeowners are approved for a specific amount of credit. Lenders will look at your income, debts, credit score and other financial history to determine the credit limit. They may also take a percentage of your home’s appraised value and subtract that from the amount owed on the existing mortgage.
The borrowing period for a HELOC is generally set for a fixed amount of time, which is called the draw period. Draw periods typically last 5 or 10 years, and you may have the option to renew at the end.
One benefit of a HELOC is that you have the choice about how much to borrow and when. Although other types of loans may require you to borrow a lump sum, a HELOC is more flexible. Your monthly payments will reflect the amount you’re actually borrowing.
Additionally, you have flexible repayment options. You also get to choose when and how you’d like to pay off your HELOC – whether you want to make interest-only payments during the draw period or pay more against the principal (the loan amount).
If you choose interest-only payments during the draw period, you’ll begin paying off the principal plus interest after the draw period ends and the repayment period begins. Repayment periods generally last 20 years.
Like with cash-out refinancing, many homeowners who choose HELOCS do so only for major financial items such as home improvements, education or medical bills.
Options For You
If the coronavirus pandemic has put your finances in a pinch, there are several opportunities available to help you obtain extra funds when you need them.
We invite you to learn more about our options for refinancing your mortgage or applying for a home equity line of credit.
At Academy Bank, we’re here to answer your questions and work with you to find the best solutions for your needs during this uncertain time.
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