• Louis Baca

What is home equity and why should I care?

Updated: Nov 24, 2019

Home equity is the difference between what you owe and what your home is worth.

The calculation to determine your home equity is easy! Take your estimated home value and subtract your mortgage balance. (If you have a second mortgage or line of credit, you'll need to include the amount owed on all mortgages.)

For example:

Market value $300,000

- Mortg. owed $150,000

Home equity $150,000

Common uses for home equity include:

  • Consolidate debt

  • Combine mortgages into 1 low payment

  • Payoff student loan debt

  • Pay for college tuition

  • Buy a condo/townhome/house for your kids in college

  • Buy a second home or vacation property

  • Buy an investment property

  • Home improvements

  • Capital for business

  • Start up a business

  • Pay for large purchases: engagement rings, weddings, healthcare, medical bills, etc.

  • Securitize equity to maximize on asset growth during recessions

How do I access the money in my home?

It's quite easy and not nearly as mind-numbing an experience as when you bought. You can gain access to your equity in as soon as two to three weeks!

You have only a few options when it comes to "cashing in" your equity:

  • Add a home equity line of credit or home improvement 2nd mortgage

  • Refinance your existing mortgage

  • Sell your home

What is a Home Equity Line Of Credit (commonly referred to as a HELOC)?

A HELOC is a line of credit that allows you to access up to a set amount of your equity like a credit card. There is typically a draw period allowing you to access your equity for the first 10 years with repayment during the remaining term.

*At Geneva Financial, we have a first lien HELOC that allows you to access the equity for all 30 years.

The HELOC is based on adjustable rates which are tied to the prime rate (currently, the prime rate is 5.5%) and have not been impacted by the recent lower rates.

Homeowners may choose this route rather than refinancing a low rate into a higher rate. It may also make sense if you don't need all of the money at one time.

Declining home value environments that occur naturally during recessions expose HELOCs to the credit line being frozen, leaving you unable to access your equity if your value temporarily falls.

Will I have to pay taxes on the money I pull out?

Your home equity is yours! It is tax free. Homeowners may have to pay capital gains tax if sold within a certain time after buying. Consult with a tax professional as tax laws continue to change.

Also, remember that homeowners have the advantage of the home interest deduction on their federal tax return that may no longer qualify with certain home equity products. Again, consult with a tax professional.

Why should I refinance my existing mortgage if my interest rate will go up?

Interest rates for home loans have been historically low since 2009 when our central bank, the Federal Reserve System, lowered rates because of the Great Recession of 2008.

As a result, homeowners have been fortunate to have more of their payment to go towards the loan balance. This has allowed homeowners to build more equity along with a strong recovery since 2008, causing home values to rise because of high demand and low inventory.

Although home values have seen substantial gains, Americans have seen a substantial rise in personal debt. Most homeowners need to explore refinancing to see if there is an opportunity to use your equity while values are high, locking in your cash and staying on a fixed interest rate.

Is there a cost to find out if refinancing would benefit me?

No, there is no cost to find out if refinancing your loan would be beneficial. By presenting your loan officer with these factors, they will be able to structure different loan options:

  • Current loan principal balance

  • Current interest rate

  • Start date of loan

  • Term (e.g. 30 year fixed)

  • Insurance renewal date and premium amount (found on Homeowner Insurance Declarations Page if not on statement)

  • Annual property tax amount

  • Goal of refinancing (e.g. lower payment, lower rate, lower term, get cash out, etc.)

What's the difference between banks?

During your research, you'll discover that there are three different types of lenders: Banks, Mortgage Lenders, and Credit Unions.

Banks (also known as depository institutions) work with all different types of money from checking and savings accounts, to Certificate of Deposits, car loans, personal and business loans, etc.). You will have to go through a registered loan officer in order to access their mortgage products.

Mortgage banks (also known as non-depository institutions) work with all different types of mortgages and do not offer anything but real estate financing. You will have to go through a licensed loan officer in order to access their mortgage products.

Credit Unions are much like banks in the sense of working with all different types of money, except they are more exclusive by only offering their products to members. The loan officers at credit unions are also registered, but not licensed.

What is a mortgage broker and why is it not included as a lender?

Brokers are NOT lenders. They simply connect the homeowner with the bank that can fund their loan. They charge a fee for their service payable by the lender or the consumer. Homeowners usually search out a mortgage broker if they don't fit in the typical loan criteria (such as self-employed, low credit scores, foreign nationals, etc.)

*At Geneva Financial, we have ALL types of loans to fit your needs eliminating the need to hire a third party to find the best options for you!

Why do some lenders market no closing cost loans?

Let me be perfectly clear, there is NO SUCH THING as a zero closing cost refinance. Every lender has to charge closing costs, however, you may come across lenders advertising no-closing-cost loans. The closing costs are being credited back by charging you a higher than market rate.

Certain loan types, such as FHA or VA mortgages, offer streamlined refinance programs that allow for limited documentation, possibly no credit check, or appraisal required. These loans can have lower costs.

Some conventional loan products allow for property inspection waivers that don't require an appraiser to inspect the inside of your house. When pulling equity out of your house, you'll be required to have a full appraisal done.

Most often, homeowners are able to include their cost into the loan so they do not have to come out of pocket.

What out of pocket costs will I have?

Most often, you will only need to pay for an appraisal, although in certain instances, like condominiums, you may have to pay for Homeowner Association Questionnaire fees directly to the association in order to get required documentation from the HOA.

What happens to my escrow account for my current loan?

Once your current mortgage is paid off, the escrow account will be reconciled and the balance refunded to you. Sometimes it takes several weeks after the loan has been paid off before receiving the refund.

In some cases, the escrow balance will be applied towards the principal loan balance during payoff.

Be aware of when homeowner insurance premiums are set to renew and when property taxes are due. If refinancing when these are due, it could cause double payments to be made by the current mortgage servicer and the new loan.

Will I be able to skip two payments?

Certain loans allow for you to payoff your mortgage by refinancing and due to the timing, you may be able to avoid making two payments (the current month and following month). Other types of loans allow for only one skipped payment.

If your loan closes during the first few days of the month, you may be eligible to do a short-pay, which means your payment will be due the immediate following month after closing.

What if I'm remodeling or doing renovations?

Typically, you'll want to complete the work prior to having the appraisal done. Otherwise, the appraisal may be marked as "subject to" the work being completed.

If your loan doesn't require an appraisal or full appraisal, you should be fine.

What other investments can I use my equity for?

Securing your home equity in other safe investments may be wise during economic peaks like we are currently experiencing. When recessions hit, home values decrease and your equity may go away.

Keeping your money safe means moving it into sound investments that are still accessible when you need it.

Consult a financial planner to find different investment vehicles that will continue to compound during downturns in the economy.

For example, I recommend looking into Indexed Universal Life insurance policies since they can have 0% floors (meaning you couldn't lose your money in the market) and some have 25% caps, allowing for a higher return on investment, there are no tax penalties for withdrawal, AND you can borrow against the death benefit instead of liquidating your compounding money!

There are many other investment tools that protect your money. Consult with a financial advisor or planner for strategies that will help you achieve your goals.

How do I get started?

The easiest way is by calling me at 214-395-7630 for a brief, no-cost consultation. The fastest way is to apply online by clicking HERE.

Within 24 hours, we will call you with different options to go over so you can decide which option will be best for you.

My team will seamlessly guide you throughout the entire process and provide you with white glove treatment. Are you ready to get started?

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