Lump Sum Home Equity Loans: Do
you know the value of your home’s worth?
Is your home one of the millions of homes across the country
that has dramatically increased in value over the past few
years? If so, you may have amassed a considerable amount of
equity in your home.
Equity is the difference between what your home is currently
worth and how much you owe on it.
Let’s say that three years ago you bought a home for
$150,000 and you put down $15,000. That means you took out
a mortgage of $135,000.
Let’s further assume that over the last three years
your home has increased in value and is now worth $200,000.
If we ignore the payments you’ve made over the past
three years (most of which went toward interest payments anyway)
then you now have a home worth $200,000 and you owe $135,000
on it.
Simply subtract the $135,000 that you still owe from the
home’s current value of $200,000 and you discover that
you have $65,000 in equity. That equity is money that is yours
and which you can take out of your home and spend practically
any way you see fit.
The questions is, what’s the best way to get your hands
on that money?
You have several choices. Your could sell your home. Doing
that will put your equity in your pocket – but then
you have the problem of where you’re going to live.
Buying a new home could use up much of your equity.
Another choice is to refinance your current mortgage –
that is to replace your current mortgage with a new mortgage
for the current value of the home, allowing you to take out
a large part of your equity in cash. This makes the most sense
if interest rates are lower now than they were when you took
out your current mortgage, but if your goal is simply to get
your hands on all or part of that $65,000 in equity perhaps
you don’t care about current interest rates.
Another choice is to take out a lump sum equity loan –
also known as a second mortgage. Equity loans are generally
fairly easy to qualify for since they are collateralized by
the equity already in your home. Often an equity loan requires
little paperwork, especially if you apply for your home equity
loan online. During periods of low interest rates and homes
that are generally appreciating in value it is common to find
125 percent equity loans.
With the lump-sum equity loan your equity is simply handed
to you all at once and you are responsible for making monthly
payments on your new equity loan in addition to your normal
monthly first loan payment.
No matter how you look at it, the recent run-up in the value
of homes has created a great deal of equity for many homeowners
and given them a lot to consider.
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