Advantages of a Cash Out Home Loan
What is an Equity Loan?
An equity home loan is a product that allows consumers to use the appraised value of their house for a mortgage to pull out cash. Home equity mortgages are designed for people to get cash out of their property without having to sale their house. This being said, these types of home loans have become a very popular and beneficial type of loan for homeowners.
How to Calculate Your Equity
How to calculate how much equity you have vested in your house can be done by taking the appraised value of your home and subtracting what you currently owe on your home loan. For example, if your home is worth $100,000 and you owe $40,000, then you would have $60,000 in equity.
For some states like Texas, laws limit how much a homeowner can borrower of their equity. Texas laws limit cash out home loans to 80% of the value of the house. For instance, if a home is worth $125,000, the maximum loan amount for a cash out home loan is $100,000.
Why Do An Equity Mortgage Loan?
There are several reasons why a homeowner would want to do a cash out loan. From paying off high interest credit cards, to pulling cash out for home improvements, to going on a dream vacation and sending their child off to college, there are many reasons to do a cash out home loan.
Paying Off High Interest Credit Cards
One of the biggest advantages of doing a cash out home mortgage is the amount of money you can save on a monthly basis by consolidating your debts. If you are like most consumers, you have credit cards with high interest rates. Let’s say that you have a mortgage loan with a balance of $100,000 at 5% with a $550 monthly payment and you also have $50,000 in credit card debt with an average rate of 12%. The average monthly payment on the credit cards with that balance and rate would be around $1000 a month. Your minimum monthly payment for your mortgage loan and credit cards is $1550.
If you were to combine those debts into a cash out home loan with a loan amount of $150,000 and a monthly payments at $805 monthly, you would save about $745 a month. The new cash out home mortgage loan with a payment of $805 a month will save you money compared to a mortgage payment of $550 and credit card payments of $1000. By consolidating the debts into one low payment, you have lowered your monthly payment load.
What could you do with that extra $745 a month?
You could pay off the new home mortgage quicker, or put money into a savings account, or go on that dream vacation you have been waiting to take! Not to mention, the interest you pay on your credit cards is not a tax deduction but the interest you pay on your home mortgage loan is a tax deduction (please consultant a tax consultant for interest deductions).
Another reason to do an equity home loan is for home improvements. Since you can use the equity from your home to do whatever you want, you can use the equity for home improvements like remodeling you kitchen or even adding in a new swimming pool.
There are many different types of equity home mortgage loans from the cash out refinance to the home equity lines of credit, it is important to talk with a mortgage consultant to see which home mortgage loan program is best for your situation.