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, our next move and our finances.
Though the federal government has issued several rounds of stimulus checks to Americans in order to help offset the economic impact, many of us are still feeling concerned about finances.
And during these uncertain times, you may be one of many people who feel like 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 at your primary residence, there are several ways to get the cash you need, when you need it.
As a homeowner, you have several 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 how refinancing and HELOCs can help you get the cash you need.
Cash-Out Refinance
As interest rates dropped over the past year, many people have chosen to refinance their mortgages. But refinancing can be done in a few different ways — it just depends on your goals. If you want to take advantage of the low interest rates or get more favorable loan terms as the borrower, you could consider a “rate-and-term” refinance. With the changing interest rates, this is often a good option to save some money.
However, there’s another refinancing option available if you have a different desired outcome. If you need extra funds — for an emergency, home renovations, your next move, or paying off debts — you can also consider a cash-out refinance.
A cash-out refinance converts your home equity into cash through the process of refinancing. Here’s how it works: You take out a mortgage for a larger amount than your previously existing loan amount. Then, the difference is paid out in cash to you as the homeowner.
Here’s an example of how a cash-out refinance would work. Let’s say your original mortgage amount for your primary home 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.
By doing a cash-out refinance, you decide to refinance your mortgage to a new loan — $150,000. While you still owe the $100,000 balance on your home, the additional $50,000 amount gets paid out to you in cash.
Cash-out refinancing is popular for several reasons. First of all, the money received is tax-free because it isn’t considered to be income. And in some cases, you still may be able to get a lower interest rate than what you were previously paying on your mortgage.
Those who plan to make home repairs with their cash-out may be able to deduct the mortgage interest from their 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)
Just like cash-out refinancing, a home equity line of credit (HELOC) uses your home equity to get you the money you need — but in a different way. With a HELOC, you use your home’s equity as collateral in return for a revolving line of credit that functions similarly to a credit card.
Here’s how it works. The homeowner is approved for a certain amount of credit. Then, lenders will look at your income, debts, credit score and other financial history to determine the credit limit. The lender may also take a percentage of the appraised value of your home and subtract that from the amount owed on your current mortgage.
HELOCs come with a borrowing period, which is called the “draw period,” and they are generally set for a fixed amount of time — usually 5 or 10 years. You might have the option to renew at the end.
With a HELOC, the homeowner gets the choice of how much money to borrow — and when. Other types of loans may require the borrower to draw a lump sum, but HELOCs are more flexible. Your monthly payments will reflect the amount you’re actually borrowing.
And the repayment options are flexible as well. You get to choose when and how you want to pay off your HELOC. Whether that’s making interest-only payments during the draw period or paying 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.
Armed Forces Bank Has Options For You
If COVID-19 has put your finances in a pinch, there are several ways that you can obtain extra funds when you need them, by using your home’s equity.
We invite you to learn more about our options for refinancing your mortgage or applying for a home equity line of credit.
At Armed Forces Bank, we’re here to answer your questions and work with you to find the best solutions for your needs.
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*Consult a tax advisor for further information regarding the deductibility of interest and charges.