Common Sen$e: Tapping Your Home for Cash

ART WOOD

Home values are crazy right now. This can be both good and bad depending on what you are trying to achieve. It’s great if you are looking to sell and downsize. It’s not if you are a first-time homebuyer. The upswing in values has endowed trillions of dollars to American homeowners, but if you aren’t selling, how do you tap into that newfound wealth?

There are three main reasons people look to take cash out of their home: paying for home improvements, paying off high interest debt, or perhaps to invest. I am often asked, “What is the best way to take cash out of my home?” There are only three options: a Home Equity Line of Credit (HELOC), a Home Equity Loan (HEL), or a full refinance of your first mortgage. Each has pros and cons, so let’s take a moment to examine each. With the recent surge in interest rates, I am recommending HELOCs more and more. The cost to open a HELOC is considerably less than that of a full refinance, and the payment on a HELOC is typically cheaper than the other two options, due to the first ten years (varying by lender) of interestonly payments. One big benefit of a HELOC is you only pay interest on what you borrow; you can have a $100,000 line of credit but if you don’t borrow against it, you don’t owe any interest payments. You have the security of knowing the money is there if you need it without having to pay large monthly payments. The one negative of HELOCs is that the rate is not fixed, and every time the Feds increase interest rates, your HELOC rate goes up, too. The rate is tied to the Prime Rate which is 3.5% now, but projected to go up at least 2% in the next six months. Some lenders will allow you to lock in a rate for a balance owed and turn it into more of a loan vs. a line of credit.

The second option is a Home Equity Loan. A HEL is like a HELOC in that it is relatively cheap to open, but it is different in that it is a fixed rate and you pay an amortized payment immediately. If you want to pay off a chunk of the debt, your payment still stays the same vs. a HELOC, where the payment goes down as you pay it down. These are good for people who have a great rate on their first mortgage, but the idea of having a variable rate on a loan makes them very nervous. Rates on HELs are typical higher than either HELOCs or current first mortgage rates.

Finally, you can always pull cash out by refinancing your first mortgage. In 2020 and 2021, I did a lot of client refinances because rates were so low. Now that rates are solidly above 5%, it may not make sense to refinance a first mortgage that has a rate of 3%. Also, a refinance of your first mortgage will cost thousands of dollars. When I am helping a client make the decision on whether to pull money out using a first mortgage, I look at their current rate, plus I also look at how much they want to pull out. If it is a small amount as compared to their current first, I recommend a HELOC or HEL. If they want an amount that is a large percentage of their mortgage debt, I recommend a first mortgage refinance to mitigate the risks of a variable rate.

As always, there is not a “one size fits all” approach to lending, so I hope this information helped decipher which options are best for you. I believe a HELOC is a wonderful tool and security blanket and think every homeowner should have one. Notice, I didn’t say you should use it, but they are great assets if you do need them. There are a couple of great HELOC/HEL providers in Tucker. Feel free to reach out to me if you would like an introduction to one, or if you have any questions in general.

ART WOOD (NMLS #118234) is the branch manager of The Art Wood Mortgage Team of Goldwater Bank, located at 2341 Main Street in downtown Tucker. “Tucker’s Mortgage Guy” for sixteen years, he is a former Tucker Tiger (Class of ’92), and co-founder and organizer of Taste of Tucker. Family guy, community guy, and definitely not your typical mortgage guy - it’s all that he does that makes Art Wood who he is. Contact him at 678.534.5834 or art.wood@goldwaterbank.com.