If you own a home and have been making consistent monthly mortgage payments, chances are you have considerable equity in your property. Property values have risen considerably across the country during the past few years, and as we know from history, there may be small declines in real estate, but they do not last long, and over the long term, property values almost always rise.
There are several ways to access this cash, and they are not all created equal. If you are considering accessing the equity in your property, make sure you make the best decision on which financial product to use.
Cash Out Refinance
In a cash out refinance, the old mortgage is completely replaced with a new one. The proceeds of the loan first go to pay off your existing mortgage, and the remaining cash goes to the borrower. This can be a great way to access the cash, but it will come with an additional 15 or 30 years of monthly payments.
Home Equity Line of Credit
In a home equity line of credit, the original mortgage stays intact, and a revolving line of credit is authorized. The borrower only needs to make payments and pay interest on the money that is withdrawn from the account. This offers a lot more flexibility than a typical cash out refinance.
Home Equity Loan
A home equity loan, also known as a second mortgage, is simply an additional loan on the equity in the home. The original mortgage stays intact, just like in a home equity line of credit, but instead of the revolving line, once the loan closes, cash for the entire amount of the loan is disbursed to the borrower, leaving them with two monthly payments to make.
A reverse mortgage is another loan on your home equity, except instead of receiving a single lump sum of cash at the onset of the loan, payments to the borrower are paid monthly. Later on, when the home is sold, the lender gets paid back with interest. These are often marketed to seniors with the purpose of supplementing their retirement income.
Homeshares is a different type of way to access your home equity altogether. Unlike the other ways of accessing home equity, this is not a loan at all and thus does not accrue interest.
When you partner with Homeshares, you receive a lump sum of cash for some or all of the equity in your home. This is not a loan, so there are no monthly payments or any interest that accrues. You are simply trading equity for cash. The partnership ends when the home is sold sometime in the future.
Depending on your financial situation, needs, and goals, all five of these tools can be great ways to access equity in your home. The important thing is to look at your budget and decide whether or not you can afford an additional monthly payment. Many people find that taking on more debt is not ideal for them, and in that case, Homeshares can be the perfect solution.