What are the alternatives to the home equity loan?


Need cash fast, but not inclined to take out an additional loan to tap into the equity you’ve put into your mortgage? There are other options if you know where to look, some of which may charge little or no interest.

A popular option that you may have come across is a home equity loan. This involves a borrower with an existing mortgage who has put equity into the loan to take out an additional loan secured by that equity.

For example, if a borrower has a house worth $ 1 million and their mortgage is $ 600,000 past due, then their equity is $ 400,000. A home equity loan can give you access to your usable equity in the form of a loan. Your usable equity is usually 80% of your home’s value minus your remaining mortgage – in this case 80% of $ 1 million equals $ 800,000, minus your $ 600,000 mortgage, leaving you with $ 200,000. of usable net worth. Some borrowers may use these funds for renovations to further increase the value of their property, which in turn increases their equity.

Whether you’ve been faced with an unexpected repair bill or want to take the family on vacation, there are a range of reasons someone may need access to cash. And not all borrowers will want to consider a home equity loan.

Let’s explore some of the alternatives that may be available for mortgage holders looking to access funds:

  • Compensation account and withdrawal facility

If your home loan offers features like a netting account or a buy-back facility, an alternative to a home equity loan may be to simply withdraw some of those funds.

With a clearing account, if you have made any payments to the account, you should be able to withdraw some or all of them without penalty depending on your needs. With a repurchase facility, if you’ve made additional payments on your home loan, you may be able to withdraw some or all of those funds. Some providers may charge a fee to access funds in the withdrawal feature, so check this before continuing.

The advantage of using these features instead of taking out a home equity loan is that you can access funds without incurring additional debt. However, by doing this, you can increase the amount owed on your loan again and see your regular mortgage payments increase, along with the amount of interest you can pay over the life of the loan.

  • Refinance to access equity

One of the many reasons homeowners may consider refinancing is to access the equity in their mortgage. If you are hoping to avoid a home equity loan, you may want to consider refinancing your mortgage to unlock the equity in it.

When you refinance your mortgage with a new provider, you may want to negotiate an increase in the loan amount. For example, the hypothetical borrower with a mortgage of $ 600,000 but equity of $ 400,000 may refinance with a new lender but choose to increase the mortgage to $ 650,000. The lender can choose to allow this because they know the borrower has enough equity in their property to pay off that extra $ 50,000 if the worst happens and they don’t repay the loan.

Ideally, you would also refinance with a lower rate lender or one that charges lower fees. Indeed, by increasing the amount of your loan, you will naturally increase your current mortgage payments and the total interest paid over the life of the loan. It may be better for your finances to balance the new, higher loan amount with a lower interest rate, for example.

Another alternative to taking out a home equity loan may be to consider another credit product instead. If you’re looking to have access to cash but want to avoid paying interest as much as possible, you might want to consider the benefits of a 0% purchase credit card.

This type of credit card allows borrowers to access credit and avoid interest charges for a set period of time – typically a few months but up to two years for some card issuers. And unlike a home equity loan or using an offsetting account or debit, you won’t be charged any additional interest for the interest-free period.

Keep in mind that after the interest-free period ends, your credit card will revert to an above-average interest rate. The balance owing on your account will begin to accumulate interest. Credit cards generally have much higher interest rates than home loans or personal loans, so if you are considering this option, you should make sure:

  1. You have set a budget which means that the purchase you make is repaid in the interest-free period and,
  2. You know exactly how long until the interest-free period ends.

Mortgage holders can access funds when needed, whether through their existing mortgage or by considering alternative products. Whichever option you choose, be sure to compare all of the interest rates, fees, features, and any other factors before making your final decision. Going into more debt, by any method, can hurt your finances if not handled responsibly.

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