4 Ways to Cash Out with a Home Equity Loan

A home equity loan is a form of second mortgage that allows the home owner to borrow money for major expenses. The equity in your home is based upon the difference between the property's appraised value and what you owe on the mortgage. For instance, if the value of the property is $200,000, and you owe $150,000, you have $50,000 of equity available.

A home equity loan is frequently a good choice if you must cover major expenses that are related to big ticket items, such as college tuition, home renovations, consolidating debt or other major expenses. Because you can borrow against your home's value, this type of loan may be easier to qualify for because the loan has been secured by your property.

If you want to cash out with a home equity loan, here are some features of such products to bear in mind:

Rate Is Fixed

A home equity loan with cash out is a fixed interest rate loan. It offers rates much lower than credit cards or other types of unsecured debt. In an environment where the interest rates are going up, a fixed rate home equity loan can make it easier for you to budget. Your monthly payments will remain the same over the life of the loan. Your payments will not go up. A fixed rate loan also provides more peace of mind than a home equity line of credit with a variable interest rate.

Lump Sum

You can cash out with a home equity loan by taking a lump sum payment of up to 80% or 85% of your available equity, minus what you owe. This provides the ability to pay for major expenses. You will pay back the loan amount with monthly payments each month that will go toward your accrued interest for a certain number of years. The home equity loan has to be paid in full if the house is sold.

Possible Tax Deduction

You may be able to take cash with your home equity loan and get a tax deduction. But the money needs to have been used for home renovations. This is a change in recent tax laws to be aware of.

Invest

A possibly smart use of your home equity is to invest in real estate or the stock market. Be sure to do your research to make sure that you are making a wise investment.

Things to Be Aware Of

Home equity loans come with ample benefits, but be aware of the following:

You will lose your home if you do not pay the debt. Be sure you have the long-term stable income to pay the loan off.
Do not think about getting a home equity loan if you are looking at a risky financial decision. Pulling cash out of your home for a dicey business venture is probably a bad idea.
It is easy to get home equity to pay off debts, but you can sink into more debt if you continue reckless spending.
There is a good chance you will go into bankruptcy if you take out a home equity loan that is worth more than your home.
Consider if you should take out such a loan when you are nearing retirement.

Summary

Is a home equity loan with cash out the right move for you? If you are responsible when you borrow money and have a reliable income, a home equity loan can be a smart move. It provides flexibility and a firm and fixed rate and repayment schedule. It is more predictable and stable than a HELOC, with a variable interest rate.

References

https://www.discover.com/home-equity-loans/article/benefits-home-equity-loan/