Much like using a credit card had a negative connotation in the past where swiping the plastic instead of using cash made it seem like you didn’t have the available funds, taking out a second mortgage can have the same view. In fact, using a credit card can make great financial sense when it comes to more protection against fraud compared to using a debit card, not to mention the rewards you can build by either points or cashback just by making the purchases you would make anyways, taking out a second mortgage can have an advantage as well. Each financial situation is different, but taking advantage of the equity you built into the property can turn your finances around, in a positive way.
Which Loan Product Makes Sense?
As you figure out how much you need to borrow, one loan program may outweigh the other. If you’re sure about a set amount you need, along with looking for a fixed interest rate, then a home equity loan may be the right product for you. If you would like to have an open line amount to borrow against as-needed, with interest rates that can adjust with the market, then a HELOC may make sense.
What are the Qualifying Factors?
While credit, income, and assets are a large factor in the approval (or denial) of either loan product, the amount of equity you have built up will be a deciding factor. The more you have paid down the mortgage balance as the values have continued to increase will send your loan-to-value tumbling, which is a good thing. If you divide what you owe against the value of your home, you’ll come up with a loan-to-value. Typically, lenders will allow borrowing up to 80%, so you know the window of which you have funds that are available to draw.
Does it Matter Where I Use the Loan Proceeds?
The great thing about either product is that your approval is not based on what you’re using the funds for. Since homeowners typically do not have a large emergency fund built up, sometimes drawing from your home’s equity makes the most sense. Here are some of the most popular ways to use the loan proceeds:
- Assisted Living: as much is it hurts to say, our parents are beginning to age, and as they helped raise us, it’s time for us to care for them in their time of need. Having extra funds to pay for assisted listing seems like a no-brainer.
- Starting a Business: Coming up with the necessary capital to start you own business is usually the number one setback. Tapping the equity in your home can be a great resource for those that are just getting started.
- Tuition: whether it’s time to go back to school to finish an outstanding degree or to be able to fund a child going through higher education, tuition rates continue to rise each year and can cost a fortune.
- Wedding: whether it’s you or your child’s wedding, having a lumpsum available for the best day of your life can help ease the burden when the bills start to pile up.
- Home Improvement: there are plenty of ways to improve the value of your home, but unfortunately it does take up-front funds to remodel a kitchen, bathroom, or even an entire addition.
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