How your home can help you reach your goals

With over 30 years experience in the residential mortgage industry, I’ve closed thousands of loans and worked with generations of homebuyers. Here's some of what I've learned...

Owning a home isn't just about having a place to live, home ownership is the American Dream. Your home is the place where you raise your family, build lasting memories and grow generational wealth.

We are moving into a season that homeowners, with interest rates above 7%, should be watching the current interest rates and considering refinancing.  Many homeowners can do a simple Rate/Term refinance, but some may want to consider a Cash Out refinance.  A Cash Out refinance allows you to use the equity in your house to consolidate high interest credit cards and other high interest loans.

You can think of your house as a savings account that can help you pay off debt, make home improvements, cover education costs, or even fund a dream vacation. 

Depending on your needs and the purpose of the loan you can consider a Rate/Term refinance, a Cash Out refinance, a Home Equity Line of Credit (HELOC) or a Home Equity Loan. Here’s how you can access this money through mortgage refinancing or a home equity loan: 

Mortgage Refinancing

A powerful way to leverage your home’s equity is through mortgage refinancing. Mortgage refinancing replaces your current first mortgage for a new one with better terms and lower interest rates. This can free up extra cash each month or allow you to pay off your mortgage faster.

Here's how:

1. Lower your monthly payments. If interest rates have dropped since you bought your house, refinancing can lower your monthly payments. This can help you redirect your spending toward other goals, like saving for retirement, investing in education, funding home improvements, or even a daily Starbucks run (because we all know how quickly those add up!)
2. Pay down your debt. Refinancing can help consolidate or pay-off high-interest debt. By refinancing your mortgage and using your home’s equity, you can pay off credit cards, student loans, or other debts. This can simplify your finances and save you money on interest payments.
3. Switch to a shorter-term loan. If your financial situation has improved, consider refinancing to a shorter-term mortgage. Though your monthly payments will be higher, you can pay off your mortgage faster and save on interest. This helps build equity more quickly and achieve financial freedom sooner. Plus, who doesn't love the idea of fully owning your home, sooner? 

Mortgage refinancing offers flexibility to lower your monthly payments, pay-off debts, shorten loan terms, or access cash for major expenses, leveraging your home's equity to achieve various financial goals.

Home Equity Loans (HE Loan)

If you are sitting on a 1st mortgage with an interest rate of 2.5% to 5%, a mortgage refinance may not be your best option.  If this is the case, you may want to investigate doing home equity loan.

A home equity loan, or "second mortgage," lets you borrow money based on your home's value. It provides a lump sum of cash that can help you afford big expenses that your monthly salary can't cover.

This approach is not completely without risk since your house is on the line. Still, many people prefer home equity loans over credit cards and personal loans because the interest rates are usually tax deductible and significantly lower.

Here are some of the most common uses of a home equity loan:

1. Pay off high interest. Home equity loans offer a low-cost way to consolidate high-interest debts like college loans, medical bills, and credit card debt. By combining these into one monthly payment at a lower rate, you can simplify your bills, reduce missed payments, and potentially repay the debt faster. 
2. Upgrade your home. Thinking about adding a bedroom or renovating your kitchen but don't have the funds? Home equity loans are often used to finance home improvements, allowing you to invest in your property and increase its value.
3. Gear up for back to school. For many parents, funding their child's education with savings or income isn't feasible. Home equity loans offer a low-cost way to pay for private schooling or college. With lower rates than most tuition loans, these funds can cover expenses like uniforms, supplies, laptops, and dorm fees.

Relevant Article: Don’t let tax returns control your home repairs: A guide to smart saving

Home Equity Line of Credit (HELOC)

A HELOC is similar to a credit card, but with much lower interest rates.  The difference between a HELOC and a Home Equity Loan is that the HE Loan is a lump sum of money you receive that has a fixed interest rate and term with a consistent monthly payment until the loan is paid off.  A HELOC has a variable interest rate and you only make payments on the amount of the HELOC that you have drawn on.  A HELOC is good for the following:

1. Flexibility: Borrow what you need when you need it, up to the limit of the line. Good for emergency financial needs.
2. Low initial payments: Interest only payments during the draw period.
3. Overdraft protection: Can be linked to your checking account and can be used for Overdrafts so you are not charged NSF fees.
4. Low upfront closing cost: The closing costs on HELOCs are lower than the costs for a refinance.

Homeownership is a powerful wealth building tool and tapping into the equity in your home can help you meet your financial goals for the future.

As with any financial decision, it’s essential to consider the risks and consult with a mortgage expert to determine the best option for your specific situation.

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