If you are looking to tap into the equity of your home, spend some time doing your homework. Understand the pros and cons of loan products on the market and how each might impact you. To get you started, we share some of the most popular questions (with answers!) that we get about home equity.
Is there a downside to tapping into home equity?
As with a first mortgage, home equity loans and credit lines must be paid on time. You are putting your house at risk if you do not meet the terms of the agreement, and then you could find yourself in foreclosure.
Do I require an appraisal to tap into my home equity?
Yes. A professional appraisal will indicate your loan-to-value ratio, which is necessary to determine how much equity is in your home.
Will I have to pay private mortgage insurance (PMI)?
“Private mortgage insurance is not required on our HELOCs (home equity lines of credit),” said Tom Becker, Hanscom FCU Senior Vice President of Lending. PMI only applies to first mortgages.
Are there closing costs?
Borrowing against home equity is sometimes like financing a first mortgage. There may be closing fees, such as an application fee, loan processing fee, points, origination and underwriting fees, appraisal fee, broker fee, recording fee, and annual fee. Not every lender will charge these fees, so it is recommended that you spend time comparing offers.
How can I access my home’s equity?
There are three common ways to tap into home equity: cash-out refinance, fixed-rate home equity loan and a home equity line of credit (HELOC). With a cash-out refinance, you will be able to pay off your existing mortgage and get a cash payment for the remaining balance of the new loan. A fixed-rate home equity loan, often called a second mortgage, lets you borrow one time at a fixed rate. With a HELOC, a credit line is established against the equity in your home, allowing you to borrow as needed.
Ask questions of several lenders to understand the variety of HELOC products on the market and what is required of each. A little homework now will help your home’s equity work for you in the future.
Hanscom Federal Credit Union offers a 3 in 1 Advantage Plan, a flexible way to access your home’s equity. It includes a line of credit, with options for fixed loans and a credit card. Learn more at hfcu.org/equity.