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Pros and Cons of Fast Equity Cash-Outs
Author David Schneider | Nov 14,2007
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As a homeowner, you have plenty of your hard-earned money tied up in the equity of your home. For any number of reasons, it may be advantageous to have access to this asset without actually having to sell your house. For example, you may need a large sum of money to help pay for college, medical bills or home renovations. Fast equity cash-outs are the key to accessing all that equity, and there are three major types available to you: home equity lines of credit (HELOC), equity loans and bridge loans.
Home Equity Lines of Credit (HELOC)
If you are the type of homeowner who likes to plan ahead, then a home equity line of credit may be a great option for you. HELOC loans are similar in structure to a credit card. Your lender will provide you with a line of credit based on the amount of equity you have in your home, and you can use as much or as little of that line of credit as necessary.
Pros and Cons of HELOC Loans
One of the pros of a HELOC loan is that you only pay interest on the amount you actually buy on credit. This differs from a typical loan, which you must pay monthly interest on regardless of whether you've spent the money or not. Another benefit is that purchases made through your line of credit are tax-deductible. This often makes them a great alternative to credit card debt. Due to the unique structure of HELOC loans, it is often recommended that you purchase one prior to actually needing it. That way, you will have quick access to tax-deductible money if necessary.
Things to consider before purchasing a HELOC loan are the adjustable interest rate and additional setup fees. Unlike options like an equity loan, HELOC loans typically carry an adjustable interest rate. This means that the amount of interest could potentially increase as market rates change. You will also need to be aware of additional costs such as application fees, attorney fees and appraisal fees.
Home Equity Loans
A mortgage home equity loan allows you to borrow a large lump sum of money based on the amount of equity in your home. This type of fast equity cash-out works much like a traditional home mortgage loan. Your lender will review your credit history, amount of equity and home value to determine the size and accompanying interest rate of your loan. You will make a monthly payment that will go towards principal and interest until the equity loan is paid off.
Pros and Cons of Home Equity Loans
Home equity loans usually include a fixed rate of interest. This is beneficial because it can allow you to lock in a low interest rate and keep it throughout the term of the loan. Home equity loans also typically allow you to borrow a larger percentage of your equity (100 percent or more) for a longer period of time. This makes them a manageable loan option for larger sums of money. The last benefit worth noting is that interest is tax deductible on a home equity loan.
Home equity loans can take up to a month to acquire. If you need cash fast, it may be more beneficial to have a HELOC loan on hand. Home equity loans also carry upfront costs that can make them costly for short-term spending needs. If you are planning to put your tax-deductible dollars towards an unnecessary expenditure such as a vacation, then you may want to reconsider.
Bridge Loans
Bridge loans are loans that help homeowners bridge the gap between their present and future home. If you want to buy a home before you have sold your current house, then a bridge loan can grant you access to the equity in your home. This allows you to put the equity in your home towards the down payment of the new home before it is actually available.
Pros and Cons of Bridge Loans
Bridge loans are short-term specialized loans. They typically carry a term of one year, but will be paid off immediately following the purchase of your current home. As HELOC and home equity loans are not available to houses that are up for sale, bridge loans are the only way to access your equity in such a scenario.
Consider other options before tapping your equity with a bridge loan. High fees make them extremely costly in comparison to accessing other funds, such as stocks or a 401(k).
As a homeowner, you have plenty of your hard-earned money tied up in the equity of your home. For any number of reasons, it may be advantageous to have access to this asset without actually having to sell your house. For example, you may need a large sum of money to help pay for college, medical bills or home renovations. Fast equity cash-outs are the key to accessing all that equity, and there are three major types available to you: home equity lines of credit (HELOC), equity loans and bridge loans.
Home Equity Lines of Credit (HELOC)
If you are the type of homeowner who likes to plan ahead, then a home equity line of credit may be a great option for you. HELOC loans are similar in structure to a credit card. Your lender will provide you with a line of credit based on the amount of equity you have in your home, and you can use as much or as little of that line of credit as necessary.
Pros and Cons of HELOC Loans
One of the pros of a HELOC loan is that you only pay interest on the amount you actually buy on credit. This differs from a typical loan, which you must pay monthly interest on regardless of whether you've spent the money or not. Another benefit is that purchases made through your line of credit are tax-deductible. This often makes them a great alternative to credit card debt. Due to the unique structure of HELOC loans, it is often recommended that you purchase one prior to actually needing it. That way, you will have quick access to tax-deductible money if necessary.
Things to consider before purchasing a HELOC loan are the adjustable interest rate and additional setup fees. Unlike options like an equity loan, HELOC loans typically carry an adjustable interest rate. This means that the amount of interest could potentially increase as market rates change. You will also need to be aware of additional costs such as application fees, attorney fees and appraisal fees.
Home Equity Loans
A mortgage home equity loan allows you to borrow a large lump sum of money based on the amount of equity in your home. This type of fast equity cash-out works much like a traditional home mortgage loan. Your lender will review your credit history, amount of equity and home value to determine the size and accompanying interest rate of your loan. You will make a monthly payment that will go towards principal and interest until the equity loan is paid off.
Pros and Cons of Home Equity Loans
Home equity loans usually include a fixed rate of interest. This is beneficial because it can allow you to lock in a low interest rate and keep it throughout the term of the loan. Home equity loans also typically allow you to borrow a larger percentage of your equity (100 percent or more) for a longer period of time. This makes them a manageable loan option for larger sums of money. The last benefit worth noting is that interest is tax deductible on a home equity loan.
Home equity loans can take up to a month to acquire. If you need cash fast, it may be more beneficial to have a HELOC loan on hand. Home equity loans also carry upfront costs that can make them costly for short-term spending needs. If you are planning to put your tax-deductible dollars towards an unnecessary expenditure such as a vacation, then you may want to reconsider.
Bridge Loans
Bridge loans are loans that help homeowners bridge the gap between their present and future home. If you want to buy a home before you have sold your current house, then a bridge loan can grant you access to the equity in your home. This allows you to put the equity in your home towards the down payment of the new home before it is actually available.
Pros and Cons of Bridge Loans
Bridge loans are short-term specialized loans. They typically carry a term of one year, but will be paid off immediately following the purchase of your current home. As HELOC and home equity loans are not available to houses that are up for sale, bridge loans are the only way to access your equity in such a scenario.
Consider other options before tapping your equity with a bridge loan. High fees make them extremely costly in comparison to accessing other funds, such as stocks or a 401(k). |
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