September 04, 2018
We know many Americans struggle with debt. Our recent survey showed that while homeowners are house rich, they’re also cash poor with little day-to-day liquidity. Survey takers indicated if they did have debt-free access to their home’s equity, they’d use it to pay off credit card debt, medical bills, or even help friends and family pay off debt. Additionally, many homeowners responded that they haven’t even considered available options to tap into their home equity. In short, they feel stuck because available financial options only seem to add more debt and interest to the homeowner’s monthly balance sheets.
The good news? This “house rich/cash poor” status quo doesn’t have to continue.
If you’re carrying a lot of debt and are worried about your credit, you may think that your home equity is inaccessible. But with a new, non-debt financing option available to a variety of homeowners, you may be surprised at what you can access.
Here are a few ways you can tap into your home equity to start using that liquidity to reach your financial goals.
*Hometap note: The following options are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a fiduciary financial advisor.
A cash-out refinance is when you, the homeowner, take out a new, larger mortgage, pay off your current mortgage, and use the excess to fund your needs. This can be done through your existing lender or a new lender and is not considered a second mortgage. According to Bankrate, you typically need at least 20% equity in your property to qualify, and you’ll pay interest on the life of the loan (usually 15 or 30 years). Because of the long duration of a cash-out refi (as they’re commonly known), you’ll want to ensure the interest rate and your expected repayment plan fit into your monthly budget.
Would you qualify for a home equity loan or a home equity line of credit (HELOC)? First, you need to know the difference between these two home equity options.
According to the Consumer Financial Protection Bureau, a home equity loan “allows you to borrow money using the equity in your home as collateral.” A HELOC, on the other hand, “works like a credit card where you have an account where you can draw funds from an as-needed basis,” says the team at The Lenders Network. With both home equity loans and HELOCs, your credit score and home equity value will play a part in how much you’ll be able to borrow and your interest rate.
Most home equity lenders will require a FICO score of 675 or higher from potential borrowers, says U.S. News & World Report. But even if your credit score is below that benchmark, you shouldn’t be discouraged from seeking out a home equity loan or HELOC. Julia Ingall with Investopedia says homeowners with bad credit should comparison shop for lenders open to working with borrowers like them. Additionally, Ingall notes that working with a mortgage broker can help you “evaluate your choices and guide you to reputable lenders.”
A Home Equity Advance, like what we offer at Hometap, enables an investment company to pay you out today for some of the equity you have accumulated in your home (typically between 5-15% of your home’s current value). You get cash without having to sell your home or take out a loan; we hold our share and receive an investor return (typically a percentage of the sale price) when you do eventually sell your home, or buy out the investment, within the term.
It’s a last resort, but homeowners with less than perfect can access their home’s equity by selling it outright. Of course, this decision is predicated upon finding a more affordable house for your next home, including favorable mortgage terms for your new place, and ensuring you don’t spend too much on real estate fees or moving costs. (And we haven’t even factored in the incalculable emotional costs and stressors selling your home and moving will entail…)
If you’re feeling house rich and cash poor like so many Americans, you now have a host of options to access your home equity regardless of your credit score. As with any major financing decision, consult with a trusted financial professional to determine your best course of action, and get moving toward your goals.
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Home prices in the U.S. are rising rapidly, while employee wages are remaining stagnant. The result? American's today spend a higher percentage of their income on housing than ever before, making the saying "house rich, cash poor" truer than ever.