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Rising home values and interest rates have many homeowners turning to home equity products to meet their personal financing needs. Because it's secured by property, taking a cash-out refinancing or a Home Equity Line Of Credit (HELOC) is typically one of the best options for consumers and cheaper than using a credit card or unsecured forms of borrowing.  Equity which is the difference between your home's value and mortgage balance accumulates from paying down your loan and from the increase in home prices over time. Recent tax law changed the rules about deducting interest paid on a home-equity loan or line of credit. You can only deduct the interest on a home-equity loan if you use the money to buy or improve your home. You can't deduct it if you use the money to consolidate debt or buy a boat or pay your kids college tuition. You can also deduct interest up to a combined mortgage balance of $1,000,000. 

HELOCs typically have an interest only initial period followed by payments of principal and interest. These lines of credit usually have a floating interest rate tied to an index such as the bank prime rate. Borrowers will see a big payment jump when the loan switches from interest-only to a fully amortized loan. Their interest rate will also rise when mortgage rates increase. A HELOC makes more sense if you plan to sell the property or move before the fully amortize payment period begins. Depending on how much you borrow and your FICO score, a HELOC interest rate is about 5.5% or 5.62%. 

Cash-out refinance is a good option if you have specific purpose for the funds such as home improvement or debt consolidation. You can choose a fixed rate of 4.25% or 4.5%. If you currently are paying monthly mortgage insurance, cash-out refinancing is good way of having it removed and getting funds as well towards that home improvement that you've been planning.  

Today's home equity borrowers have far higher credit scores and borrow less and lenders are more responsible in their underwriting of home equity then they were Pre-Crisis of 2016. In 2017, homeowners borrowed only $262 billion with cash-out refinances which represents only a paltry 1.25% of available equity. Here are 7 most popular uses of  cash-out and HELOC: 

  1. Home improvements accounts for 42.9% with Average Property Value of $206,824, Average Loan Amount of $38,662 and Average Loan-To-Value of 67%. 
  2. Debt Consolidation accounts for 38.2%. Average property value of $206,435, Average Loan Amount of $37,000 and Average Loan-To-Value of 74%. 
  3. Emergency expenses account for 0.2%: Average Property Value of $212,213, Average Loan Amount of $35,747 and Average Loan-To-Value of  58%. 
  4. Down payment on investment property accounts for 0.3%. Average Property Value of $301,025, Average Loan Amount of $103,625 and Average Loan-To-Value of 71%.
  5. Retirement income accounts for 1.3%: Average property value of $293,388, Average Loan Amount of $74,207 and Average Loan-To-Value of 56%. 
  6. Other Investment purposes accounts for 7.8%: Average Property Value of $252,992, Average Loan Amount of $80,241 and Average Loan-To-Value of 70%. 
The biggest danger of taking home equity is not being able to repay your loan or needing to sell you home in an emergency sale or losing it to foreclosure  Homes are our greatest asset, use it wisely and protect it as we are living longer and are more responsible of our own financial security. 
Posted by Sam Kader on June 27th, 2018 9:45 PM

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