If you are looking to sell your home for a profit, it can really benefit you with substantial cash. However, when you are still living there, you won’t really gain much, or at least, the money is out of reach. The one exception to that rule is when you get the equity with a line of credit or a loan.
Either a home equity loan or line of credit is taken out based on the value of a home and is generally greater than what is owed on the mortgage. When you look at the pros and cons of each option, it can help you to choose which one is better for you.
Gaining the Value of Your Home
Today, lenders no longer allow you to borrow against 100 percent of the value of your home. It led to the housing market crashing in 2008. Since that time, lenders have been much more sensible.
Instead, the amount you owe on your outstanding home loan is divided by the market value of your home. This is considered the combined loan to loan ratio or CLTV. When the ratio is high, lenders are reluctant to allow you to borrow more versus the value of your home. Although these days, the standard CLTV range is between 70 to 80 percent, lenders may give you a higher amount if you are creditworthy.
Home equity loans are also referred to as a “second mortgage,” which is a lump sum of equity. It is usually combined with a fixed interest rate and is a source of income for onetime expenses and major projects within the home. Since the interest rate is bundle within a home equity loan, it is easier to create a budget for your monthly payments. However, it’s important to remember that this loan payment is made in addition to your regular mortgage payment. The pros of home equity loans are: fixed interest rates and tax deductible interest. The con of a home equity loan is: it can work against you if your property value declines.
Home Equity Line of Credit
A home equity line of credit, also known as a HELOC, lets you draw money as you need it through a debit card or via writing checks. It offers a convenient way to pay for home projects and you pay interest only on the specific amount you draw.
A HELOC typically starts off with an interest rate lower than that of a home equity loan. However, they also feature variable rates that may rise or fall depending on certain circumstances, which means your monthly payments can do the same.
During the introductory period of a HELOC, you may have interest only payments, with principle and interest payments due thereafter. When repayment starts, you cannot make further draws on your line of credit. The pros of a HELOC are: interest is paid on the amount you draw and not on the total available equity in your credit line; you make interest only payments during the draw period and you’re the interest you pay is typically tax deductible. Cons of a HELOC are: when the interest rates increase, so can your payments and if you’re not careful, you may overspend and have a large principle and interest payment during the repayment period.
It is important to understand the benefits and negative aspects of both home equity loans and lines of credit. Weigh out all of the options of both and you will better be able to make an informed decision as to which is right for you when you decide you want to sell your home for a profit at some point.