Are you looking to take out a loan? As a homeowner, you may have several home equity options available to you. Let’s take a closer look at the four home equity options to consider.
Residential sale-leaseback is becoming an increasingly popular option for home equity, especially among retirees. Here’s how it works: the sale-leaseback acts as a contract in which the buyer agrees to allow the seller to continue to live in the home at a rent that both parties agree to.
Although this takes you from homeowner to renter status, it allows you to have full access to your home’s equity. This option gives retirees more financial freedom.
Sale-leasebacks are also a good option if you’re looking to buy a home but haven’t found “the one” just yet, as you’ll still have a place to live in the meantime.
Pros: There’s no rush to move into a new home.
Cons: The seller will no longer be able to take advantage of any appreciation that accrues after the contract takes effect.
2. Reverse Mortgage
A reverse mortgage is a loan that’s available to people 62 years or older. With this type of loan, you borrow against the equity of your home from the lender who you paid your mortgage to. You don’t have to pay a reverse mortgage back until you sell your home or you die (in which case, your estate repays the loan).
Pros: You don’t have to pay interest on the money you receive from a reverse mortgage. It’s ideal if you need money but don’t want to move.
Cons: The downside with a reverse mortgage is that there are a lot of fees that will lead you to owe more money over time.
3. Home Equity Loan
A home equity loan allows the homeowner to borrow money against their home’s equity. (Your home is used as collateral). The amount you’re able to take is based on the market value of your home vs. the amount of money you owe on your mortgage.
This option is often used by people who want to renovate their homes. It can also be ideal when it’s used to consolidate debts at a lower interest rate.
Pros: Your interest payments could be tax deductible. You’ll pay a fixed rate, and you’ll have lower borrowing costs.
Cons: If you decide to sell your home before the loan has been repaid, you will also need to pay off the balance. There is a risk of losing your home if you default on the loan.
4. Home Equity Line of Credit (HELOC)
HELOCs are similar to a home equity loan in that you’re borrowing against home equity — but they’re slightly different, too. You can generally borrow up to 85% of your home’s value (aside from anything remaining on the mortgage).
Pros: The main benefit is you can use the funds only as you need them. This makes HELOCs an ideal option for having emergency funds available just in case. If you borrow less than you thought you were going to need, you’ll have smaller repayments.
Cons: Home equity lines of credit have variable interest rates, meaning your interest rate will fluctuate with the Federal Reserve. Just like home equity loans, there’s also a risk of losing your home if you default on the loan.
Before choosing a form of home equity, it’s ideal to talk to a financial advisor. Each of these home equity options comes with pros and cons, so it might be difficult to determine which is the best solution for you. In some cases, a personal loan or refinancing might be an even better option.