It can be a nice surprise to realize that you have access to cash that you weren’t aware of. For example, homeowners can get cash, pay for living expenses, buy a rental property, or even retire via their existing home equity. The amount that you can borrow is based on the amount of equity that you have in your home.
What is Equity in a House?
Before leveraging the equity in your home it’s important to understand what equity in your home is. If you haven’t fully paid off your mortgage to your lender, then they still “own” a percentage of it. However, you also “own” a percentage, and your stake is called your home equity. That dollar amount is the current difference between the size of your mortgage debt and the amount of the home you own. Additionally, the amount of your equity rises as you pay down your debt each month. As you do so you build equity that you can use when you need access to cash.
Let’s explore a few ways that homeowners can effectively leverage their home equity and unlock a range of benefits and financial opportunities.
1. Reinvest in Your Home to Boost Value
Before taking advantage of the equity in your home, you may first want to consider boosting its value. This will provide you with extra leverage because you build equity when you make substantive upgrades. It’s worth noting that there may be some tax advantages from using the mortgage interest deduction depending on your project.
An easy-to-do improvement that can add value is to create an accent wall or add color to the trim to add some splash to any room. Another inexpensive idea is to add some shine to hardwood floors with a refinish. In the bathroom, additions like a new faucet, shower head, or medicine cabinet can instantly add value.
Converting an unused common area or an attic into an extra bedroom is another great value add. In the kitchen, installing a backsplash, updating cabinetry, or replacing your countertops are all do-it-yourself ways of spending a little to gain a lot.
Replacing or painting your front door, adding crown molding around the entry, and re-grouting your patio are all great ways to boost your home’s value while helping make a great first impression. Keeping your yard tidy and adding mulch or garden will also add to its curbside appeal. Replacing the garage door, touching up the paint on the exterior, adding a few rocking chairs to the porch, and updating your mailbox will all add some pop to your curbside appeal.
Other value-boosting ideas include converting a room or closet into a home office, finishing your basement, adding a backyard deck, or knocking out a wall to create a bigger space.
Even with a limited budget, with a little creative effort, you’ll likely have a house that’s worth more than it was before investing in upgrades, and you’ll use the funds to build ever more equity.
2. Buy a Rental Property
Owning a rental property can help diversify your portfolio with a real estate investment. Passive income from a rental property could provide extra income and increased financial freedom. Therefore, using the equity in your current home may be a smart way to help you get started as a real estate investor.
In this scenario, you use the money as a down payment for the purchase of a separate home that you will rent out and then use a second mortgage to finance the remainder of the cost. To justify this type of transaction, the rental income needs to be higher than the monthly expenses. One idea is to purchase a multi-tenant building to provide additional streams of income. If the rental property is inexpensive, you might consider using the money from your home’s equity to pay for the entire cost.
If you want the property to double as your vacation home, renting it out when you’re not there could also provide you with a second source of income. In some cases, you can also deduct the expenses of renting your vacation home.
Keep in mind that most vacation areas are seasonal, so your rental may only generate income during a few months of the year. When managed effectively, a vacation home that doubles as a rental property will generate enough revenue to exceed the associated expenses. In addition to creating extra income, a second property can provide you with the option of a peaceful haven whenever you can get away.
3. Get Access to Cash
Cash-out refinancing† your existing mortgage for an amount higher than the outstanding balance allows you to receive the difference in a lump sum of cash. The lump sum of cash you receive can be used to pay off debt and loans, upgrade your home, go on a bucket list vacation, invest in the market, jump on a business opportunity, or even retire.
With a cash-out refinance you get a lump sum of cash up front, and your monthly payment won’t fluctuate. Both options involve leveraging the power of the existing equity in your home and typically you can borrow up to 80% of your home’s value.
Saving enough money to make upgrades to your home can be tough so a cash-out may provide a solution. A cash-out refinance can also help you use the equity in your home to pay off debt, pay for a wedding, start a business, or take that trip that you always dreamed about.
While these potential benefits of a cash-out refi sound enticing, there is another option available to tap into your home’s equity to get the cash you need. Newrez Home Equity Loan†† is our new loan program built specifically for homeowners looking to tap the equity in their house without giving up their current mortgage. Keep your primary mortgage interest rate on your current loan when you secure a second mortgage. Just like a cash-out refinance, your money can be put toward home projects, renovations, debt consolidation, education costs, and more.
This new mortgage product has a fixed interest rate and is disbursed in a lump sum at the beginning of the loan. You’ll start repaying it immediately through fixed monthly Principal & Interest (P&I) payments. Plus, a Home Equity Loan with Newrez is secured by your house. This means you access larger sums of money at lower rates than credit cards or personal loans.
Lenders determine how much you may borrow by considering the amount of equity in your home, your credit score, and your debt-to-income ratio. With a Newrez Home Equity Loan, we can lend up to 80% of what your home is worth. Once your fixed interest rate and monthly P&I payments are determined, you’ll receive the cash value as a lump sum at the initiation of the Home Equity Loan.
Interested in enhancing your financial prospects by taking advantage of the equity in your home? We’re happy to help! Talk to us today and let’s explore the possibilities!
