When clients approach our office looking to access home equity we usually are considering one of two options. We either refinance their existing mortgage or add a home equity line of credit. Let's take a closer look.
The Benefits and Pitfalls
1. Cash out Refinance – In this instance we look to refinance your full mortgage paying out a penalty and replacing the mortgage with a new one with the additional funds you require. This may be the best option if:
a. You want to pay principle and interest on the new debt you are acquiring
b. The penalty on your existing mortgage is not too large and we aren’t giving up a better rate of interest
c. You would like to amortize the debt over a longer period of time.
d. You would like an overall lower rate of interest on the new debt.
2. Home Equity Line of Credit – Sometimes it makes more sense to add a home equity line of credit to access your home equity. This may be the best option if:
a. You would like interest only payments on the new debt
b. You plan to repay the debt quickly
c. Your existing mortgage penalty is large and you do not want to trigger paying it
d. Your existing mortgage rate is better than the rates available today
Things to consider
There are a couple of key considerations for each of these options. We are unable to access more than 80% of the appraised value of your home. Legal costs are required for both options. Not all lenders offer a home equity line of credit. A home equity line of credit can not be more than 65% of the value of your home, if you want access to 80% of the value, at least 15% must be in an amortizing mortgage.