Most people have a lot of equity trapped in their homes. Real estate values almost always rise over enough time and coupled with the mortgage payment being made every month, after several years, there will be a lot of equity in the home.
Consumers do have access to this equity. Certain financial products can be used to turn that equity into cash that can be used for home improvements, paying down high interest credit card debt, education, or just to improve your quality of life.
There are three main ways in which equity is usually accessed. They are a home equity loan, a home equity line of credit and a home equity agreement. Each of these has its own advantages. The important thing is to make sure that the right tool is used at the right time.
What is a Home Equity Loan?
A home equity loan, also known as a second mortgage, is an additional loan on the equity in your home. In order to get a home equity loan, a bank will appraise your home and give you a loan based on the appraised value, less the outstanding balance left on the existing mortgage.
Once the borrower closes on the loan, the cash is dispersed, and then the loan must be paid back with monthly payments. These can be great loans to allow access to the equity that is trapped in the home, but some borrowers can get in trouble later because they essentially have two mortgage payments.
What is a Home Equity Line of Credit?
A home equity line of credit is a revolving line of credit based on the amount of equity in the home. The loan is underwritten similarly to a home equity loan, except that the total amount of cash available is not initially dispersed to the borrower.
The cash can be accessed on an as needed basis in a revolving line of credit, similar to a credit card. Monthly payments are required only as long as there is a balance on the loan. This can be a great tool to have to free up cash when needed instead of using a credit card, which often has a much higher interest rate than a home equity line of credit.
What is a Home Equity Agreement?
A home equity agreement is different from the previous two ways to access equity in the property since it is not a loan and does not come with monthly payments. A home equity agreement is an exchange between you and an investment company where you receive a lump sum cash payment in exchange for a portion of your existing equity.
Homeshares is one such type of home equity agreement. When using Homeshares, a homeowner will get access to the cash they need in exchange for an ownership stake in the house. Later on, when the homeowner leaves the house, on their own terms, Homeshares is repaid with the proceeds of the home sale. This can be a much better way to access the cash since it does not come with an added monthly payment, giving the homeowner the best of both worlds, access to cash and no payments.
When accessing your home equity, it is important to make sure you are using the right financial product for your own unique needs, and Homeshares can be right if you want the cash without being strapped down by an additional monthly payment.