Friends. I keep getting emails from my mortgage company offering a chance to pull from my 30k+ equity. How does that work? What happens if I try and cash it out?
In: Economics
You pay interest on the amount you pull out. Typically home equity loans or lines of credit work as interest only loans for a period of time before you begin paying down the principal, too. And any outstanding balance is reduced from proceeds if/when you sell.
If interest rates are falling, you could also do a cash out refinance, where you get money but the refinanced mortgage is more than you owed on previous one. When rates were falling, somebody might have been able to go from a 5% mortgage to a 3% one, pull out $50k and still have payments remain the same because of interest rate. With high rates, you wouldn’t want to go cash out refi route.
It’s a loan that you will pay back with interest. However, if you need a loan this is not a bad option as the interest rates will likely be as low as you’ll find.
There’s a couple ways to leverage your equity. First, you can refinance. This amounts to taking out a new loan to pay off your current mortgage. If this loan was larger than the principle still owed, you can keep the difference as cash. The catch here is that your new loan now has a larger principle and resets your mortgage duration (assuming you stayed with the same duration as the original). Due to interest rates, the new loan may or may not have a higher payment due. If your refinanced mortgage has a lower interest rate, it may offset the larger principle in terms of monthly payments.
The second way is to open a home equity line of credit. It’s basically a 2nd mortgage in that it’s a loan with your home as collateral. The amount of this loan can be up to your equity in the property. You don’t have to refinance in this case, but you’ll have a 2nd bill to pay in addition to your normal mortgage payment.
Ignore your house. The mortgage company is offering you a loan of $30k at some rate of interest (maybe 8%, depending on a lot of things). You will pay back that loan over time along with interest. If you can use the loan to do something productive, say like paying off higher interest debt investing in a business then maybe it’s worth it. Also if you need the money for something you would otherwise borrow money for it can be a cheaper interest rate than alternative borrowing options..
The only time the house comes into play is if you don’t pay the loan back, then the person or company who owns your loan takes your house, called a foreclosure. From the mortgage company’s perspective this allows them to offer you a lower interest rate because of you don’t pay them back they can still recover their money.
But you are going to pay back the loan, so your house has nothing to do with it from your perspective.
You have to pay it back. That’s the catch.
And when you pay it back, you’ll be paying interest on that 30k. (Just like the interest your paying on the home loan now)
And your mortgage company would really like you to pay them more interest.
The catch is that your home is the collateral. So if you can’t or don’t pay it back, they get to place a lien on your house.
Long story short, the company puts a lien on your house, and if you sell it they are guaranteed what you owe on the loan.
The interest is usually high, so watch for that. If you really want a home equity loan, the bank that owns the house is the best place to go, second best is your personal bank.
Banks that aren’t vested in you are taking on a lot of risk, and therefore expect a big return for their risk.
In addition to what everyone else said: you will also have to pay to cancel the loans. Source: I had to, when I canceled a long- unused loan on my house
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