We used to think that HARP-eligible borrowers were “underwater” meaning they owed more than their home was worth, but wasn’t always true. In fact, since the inception date of HARP (April 2009), 56% of all those who had completed a HARP refinance had Loan-to-Value (LTV) ratios of 80% to 105%…
Kesna Lawrence is the SVP for Client Strategy at Datamyx, the top provider of data-driven technology solutions for direct marketing in the financial services, automotive and insurance industries. Prior to joining the Datamyx team in 2004, Kesna held leadership positions at both ABN AMRO and Ocwen. He holds a B.S. in Finance and Economics from Florida State University.
Here’s some good news: After falling through the floor in the aftermath of the 2008 financial crisis, housing prices are finally enjoying a sustained upswing. According to the CoreLogic Home Price Index, year-over-year home prices rose by an impressive 11.8% in 2013, making it the best year for home price appreciation since 2005. According to the Case-Shiller Home Price Index, the U.S. housing market is “on a roll,” with year-over-year gains of over 20% in some parts of the country. After years of fretting, you may now be sitting on some valuable home equity you didn’t even know you had! The question is, how can you harness that increased equity?
Did a holiday season extravagance leave you with hefty credit card debt? Did you flee to the Caribbean to take a break from a winter of record cold? Or, more practically, have you been putting off some necessary home repairs or renovations for too many years? If so, here are three ways you can put your home equity to work for you, right away.
By means of a cash-out refinance, you can refinance your existing mortgage for an amount larger than you currently owe. The difference between the two mortgages becomes cold, hard cash that goes right into your hands. Let’s say you hold a $120,000 mortgage on a home worth $200,000. If you refinance up to a $150,000 mortgage, that $30,000 can be taken directly out as cash. There are several benefits to such a refinance:
- Instant cash out.
- Reduced interest rates and longer payback times. Instead of using a credit card with an interest rate of 15% or more to pay for a house project, why not pay just 5% on a refinanced mortgage and spread out the payments for up to 30 years?
- Tax-deductible interest rates. Not only can you save on monthly interest payments, but by lowering your tax liability, you can also enjoy lower annual tax payments.
- Improved credit score. By transferring from unsecured no-collateral debt such as credit cards to secured installment debt such as a mortgage, your credit score will increase, helping you negotiate better financing deals in the future.
Let’s say you’ve already refinanced your mortgage in the past 24–36 months. Your interest rate, then, is already low. Under those circumstances, a cash-out refinance may not be your best option. Yes, it would reduce your effective payments on credit card debt, but it would do so at the cost of increasing payments on your primary debt obligation: your home. In this case, harnessing your equity to take out a closed-end second mortgage might be a better way to go.
A second mortgage is the best option if you require a fixed amount of money and know you won’t need more later. Because it’s a secured installment loan, it will impact your credit score less than unsecured revolving debt such as credit cards. And, once again, the interest you pay is tax-deductible.
Home Equity Line of Credit (HELOC)
A home equity line of credit is ideal if you require an account from which you can continue to draw funds over an extended period of time. With a HELOC, not only can you use the funds at will, but you can also pay it down at will. As it is based on the equity in your home, a HELOC possesses all of the advantages of a secured loan over an unsecured loan: reduced interest rates, longer payoff and reduced credit score impact. Plus, if your HELOC is put toward home repair or improvement, the interest is tax-deductible. To be eligible for that tax deductibility, however, you will need to prove how the money was spent.
Homeowners have suffered a great deal over the last five years. Now is the time to reap the rewards of a housing price resurgence. By means of a cash-out refinance, second mortgage or home equity line of credit, you can put your increased equity to work for you, increasing the value of your investments and securing an even brighter financial future for you and your family.
Have any questions? Let us know in the comments below!