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ELI5: What is a home equity loan?
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I've read up on this, but the way it explains it seems fairly complicated.
Top Comment: I've read up on this, but the way it explains it seems fairly complicated.
What's the general consensus on home equity loans/locs?
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We've got a fair bit of debt to deal with and I'm trying to consider all options. I don't want to get into detail, but we are very lucky to have a fully paid home. We have two auto loans, my student loans (really hoping this latest Biden move helps with that), and a stack of cards that need paying, in addition to regular bills. Bonus if you have personal experience with the thing. TIA!
Top Comment: I had a paid-off house too, and I wanted to do some expensive upgrades that were going to take a while. So I got a home equity line of credit (HELOC) with a credit limit sufficient for all the stuff I was planning. The interest rate on the HELOC was higher than a first mortgage, but the balance was not going to be constant like it would have been with a mortgage (I didn't need all the money up front). So I paid a higher rate on a lower balance until I paid for all my upgrades. Then I took out a lower-interest first mortgage on a 15-year term to pay off the HELOC. In your case, it sounds like you have an existing amount of debt you're considering paying off with home equity. In that case, I'd go for a first mortgage, not a line of credit. The interest will be tax deductible and presumably lower than what you're paying now (although rates aren't great right now, so make sure that's true before you do anything). A first mortgage is usually the lowest interest rate loan a regular person can get, and it looks better on your credit report than other kinds of debt. The huge caveat is to make sure you don't just rack up the credit cards again. I've done that too, many years ago, and it really sucked. Look closely and honestly at the reasons behind that debt. If they still exist, you need to tackle getting those under control first. Otherwise you'll just end up with a house payment on top of credit card payments, which is worse than where you are now. Also make sure your new house payment isn't going to force you to put everyday expenses back on the cards. And take as short a term as you can on the mortgage without overburdening your income. Another thing to consider is how much of your debt you want to consolidate, and what kinds. The cars likely have a pretty short term, at least compared to any mortgage you're likely to get. You don't want to be paying off a car for 15-30 years. See if you can consolidate other debt and accelerate your car payments instead of paying them off with home equity. And of course wait to see what happens with student loan forgiveness - you certainly don't want to miss out on that. Credit card debt, on the other hand, tends to be high interest and just goes on forever as long as you're paying the minimum or not much more, so it's a decent candidate for consolidation. Again, make sure you have a solid plan to avoid accumulating more credit card debt in the future. I'd recommend closing most of the accounts to avoid temptation. You used to need a credit card to do things like book travel, but a debit card usually suffices these days. Consider other options too, like some of the strategies for paying down credit cards. Tackle one card at a time, putting every free penny into paying that one down, then roll that payment into the next one after you've paid off the first one. Pick the lowest-balance card to see results faster, or pick the highest-interest card to pay the least total amount. Of course you can start doing this immediately whether you decide to take any home equity or not. And if you do this for several months and then decide to go the mortgage route after all, the amount will be lower and your credit report will have improved.
I have $70k in home equity and $45,900 in personal debt. The personal debt averages about 6% interest and my mortgage is around 3.5%. Would it be smart to take out $45,900 in a home equity loan to pay off higher debt, and then make double up payments on mortgage?
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Quick run down.
Remaining mortgage: $158,00 at 3.6% House value: $228,000 Payments: $423 bi-weekly
Credit line: $14,000 at 6.5% Car loan: $12,400 at 4% Wife's loan: $19,500 at 6.5%
Would it be a bad idea to roll all of the personal debt that's at a higher interest rate into the mortgage. I'm able to make double up payments on every pay period and it goes directly against the principal of the mortgage (meaning $11,000 a year extra, directly against mortgage)
Right now my car loan is $196 bi-weekly, Wife's loan is $149 weekly, and I usually put down $500 bi-weekly onto the credit line ($1,000 if I get overtime at work) plus it's currently about $92 in monthly interest, which decreases as I pay it off. On average, we bring home about $3,200 bi-weekly with my wife's unemployment cheques from being on maternity leave (will lose about $900 bi-weekly in January when she becomes stay at home mom).
Suggestions please? I'm not very savy with finances and I've been trying to pay off the credit line as quick as possible but I feel like I'm living pay cheque to pay cheque trying to do it.
EDIT: I seem to have gotten confused about the home equity loan. What I wanted to do was move my personal debt onto my existing mortgage so that it was all in one place. Then I would have extra money to make double-up payments on my mortgage (extra $423 bi-weekly vs roughly $750 that I'm paying bi-weekly on loans). Then I would still have lots of room to save money and throw down a big lump sum on my mortgage when the term expires.
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I would point out that many homeowners who choose to use their equity to pay off consumer debt actually make it worse. You have to be committed to not running up your credit cards again. It is an easy trap to fall into and you could find yourself with double the amount now on your home and credit cards. Just be sure your spending habits support this kind of move. Good luck
What exactly is a home equity loan and how does it work ...
Main Post: What exactly is a home equity loan and how does it work ...
Has anyone gotten a HELOC? Would you recommend?
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Hey all! I've always wondered about using a Home Equity Line of Credit to fund home improvements, but never known anyone who's done that. If you have, what did you use it for? And would you recommend it? Thanks in advance for sharing your experience!
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A HELOC is like a credit card that uses your home value as collateral. You only pay interest on the amount you use, so if you need access to money for emergency repairs, it can be a good option. Interest rates are high right now though so I wouldn’t use it as the primary fund for unnecessary renovations.
Edit to add: I took out a HELOC for my kitchen reno last year and my interest rate has doubled since then. I have bit of regret.
home's equity: is it worth "tapping" into?
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I have recieved multiple letters/emailes from my mortgage company. I slightly understand the uses for it, but I am not 100% sure it is worth acting into.
What are the implications of using my Homes equity? Is it not like a loan? Would there be benefits to acting on it?
Top Comment: It’s a loan. Do you need a loan?
Let’s discuss (and maybe ELI5) home equity loans, HELOCs, and cash out refis
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I have read about HELOCs and home equity loans a lot but still find them confusing. Have you ever used one of these financial products for a big expense? Did it work well?
I’m a bit debt phobic, but it does seem like if you need money for a one-time home project, financing is a great way to enjoy the benefits of the project sooner rather than holding out while saving up a massive pile of cash.
When would a HELOC be better than a loan? Does interest start accruing each month on any balance, like a credit card, or do you have some time before interest starts?
Cash out refis seem like the 2021 version of the subprime mortgage to me. I get they’ve been around, but it seems like something that could lead uninformed people to overleverage on their home.
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Ok, I, too, am generally confused about HELOCs, so I won't touch that! BUT I can explain a cash out refi and home equity loan.
Home equity loan: aka "a second mortgage" where you usually take out a short term loan on your house. Let's say you take $25,000 on a 5-year term at 5% (quick calculator says your payment would be about $470/month). You would then have your regular mortgage payment and a second mortgage payment of $470. Obviously, when you pay off the loan in 5 years, the remaining regular mortgage payment still stands.
Cash out refinance: This is where you add that $25,000 to the total mortgage, so you have a singular, but higher payment. Let's say your remaining mortgage is $300,000, the house is valued at $500,000, so you have $200,000 in equity. You decide to tap that equity and take $25,000 and fund a new mortgage of $325,000. In this scenario you have a single, higher payment for the life of the loan (likely 30 years).
I get confused by credit lines and don't mess with products I can't understand. The home equity vs. cash out I can grasp!
Eli5: what is home equity
Main Post: Eli5: what is home equity
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Your home’s total current value minus the amount of debt on the home in the form of a mortgage.
For example, if you buy a house for $250,000 by putting $50,000 down payment and getting a mortgage for $200,000 you immediately have $50,000 in equity.
A year later the house is worth $275,000 and you still own $195,000, so then the equity is $80,000.
Once your mortgage is fully paid off, your equity in the home is the same as its current value.
My home's equity shot up, what's the best way to leverage that?
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So as described the home we purchased has recently shot up in value. We are a military family and purchased the house with a VA loan just over two years ago for $630k. This week one of the houses on our block, which has an identical original floorplan to ours just sold for $850k! Our house actually has an addition on it as it was remodeled right before we bought it. Our house is 1450 sq. ft. 2BR 2BA, the neighbor is 900sq. ft. 2BR 2BA. We toured the house when it was open house and its nice, but ours was actually done better with better finishes etc, plus again larger. Based on that as the comp and price per sq.ft., our house comes in at $1.3m. And houses around the neighborhood are also selling in that range. Besides the fact that this is absolutely insane,
I'm just wondering what the best way to tap into that equity would be or if it's best to leave it alone? We have a few improvements we would like to make, like a new fence, maybe renovate the kitchen cabinets and replace the bathroom vanity's. Possibly pay off a couple low interest loans we took out when we moved hear a couple years ago.
Really pie in the sky, would be adding a granny flat above the detached garage. I think that would be roughly $100k to do, but would also increase the value of the house.
As far as I can tell a HELOC looks like it would be best because we could actually defer making payments for a couple years. This is advantageous for us because our salaries will increase in the next few years. Also being military we will likely move in a about 3 years, so we could possibly sell it and pay off the loan before we ever have to make payments, if we don't decide to just rent it out.
But the other options would be a VA cash out refinance or a home equity loan. The VA refinance seems the better option of those two, but then we also have the monthly payment increase to manage.
Thanks for any thoughts or ideas!
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As far as I can tell a HELOC looks like it would be best
a HELOC is money you have to borrow from yourself with interest. it’s better to save money into a savings account and spend that. this is all assuming you have good reason to - just because you have some money, even unexpected money, doesn’t mean you need to spend it.
that said, if you have high interest loans and can get a HELOC or home equity loan for less money, it may make sense to move the debt to the lower interest option - with the caveat that you’re comfortable putting the house at risk.
ELI5: Please explain how a Home Equity Line of Credit (HELOC) works
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Firstly I do know what a HELOC is but this is how it was explained to me:
If you have enough equity in your home you can apply and get a HELOC instead of a mortgage.
Now you're mortgage free but you owe the bank at minimum the interest on the HELOC every month.
Now you're free to invest what you would have paid as mortgage principal into a high interest investments account (locked in) and in 20 years you'll have enough to pay off the HELOC, plus because of the investments you'll have retirement money.
I feel like this is a glorified rainbows and butterflies explanation and I'm looking for a more realistic explanation and whether it works or not.
Thanks
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HELOCs are very much like second liens with a flexible borrowing amount.
To explain, your typical mortgage is a first lien, meaning that if something goes south with paying back the loan, the mortgage has first dibs on the house (also called the security). You can also borrow other amounts, but each new loan has to stand in line behind the one before it, thus second lien (second in line).
Let's say you have a loan on your house, but the house is worth more than the loan. That is equity. Now, the equity has value, but it's not cash, you cannot spend it. What you can do is borrow against it, which essentially means, "hey, bank I have X amount in equity. Can I borrow X and pay you back and if I can't I'll just give you the equity?" This is generally what you call a home equity loan.
That loan is a standard fixed term loan with a fixed amount to pay back. Sometimes what you can do is say to the bank, "hey, I have X in equity. I would like to be able to borrow against that, but I don't need all X right now." So what the bank does is make it a line of credit, or something where you have the ability to borrow up to a certain amount, but you don't have to do it all right now. You can borrow a little bit now, pay it back and borrow more later. What the bank will do is charge you every year to keep the line open. That way they make money even if you don't borrow. If they didn't do that, then they wouldn't want to have the product around.
Now that is a HELOC. What is the glorified rainbows of what you say is that you can invest on a consistent basis with the money you borrow and return at a higher rate than you are paying on your loan. The problem is that most likely to earn that higher rate you have to take more risk. Also, a strategy like that can work well for a while only to fail catastrophically. Let's say it works and works and works but then, for just a few months, it doesn't. The stock market tanks or your fund stops allowing withdrawals. Well, how are you going to pay the loan? Because if you don't pay the loan, the issue is that you can lose the house, which is not what you want at all.
Now, you don't necessarily have to lose the house, you just might lose a portion of the investment you made with the borrowed money and then have to eat into other money to cover it. Borrowing to invest (aka levering up), is something to go in with your eyes open. We sort of do it every day with the house, but it can cause problems. You know about the whole subprime meltdown...
Also, keep in mind the term mortgage...it means dead pledge. Meaning that if you can't pay your loan back, the house is pledged and dead to you. It sounds like it feels.