Generally when you are purchasing a home, you are buying below the appraised value and you are making a down payment. The good news is this means you have “instant equity” in your home.
For some homeowners, this means may be considering taking cash-out from your home equity in order to pay off credit card bills, purchase a car or pay for college for one of your children. However, it is important understand, this may not be as simple as it sounds.
For other homeowners if you are 62 yrs or older you can consider a reverse mortgage refinance ( Home Equity Conversion Mortgage aka HECM.) If you have a mortgage it needs to be paid off in the refinance but the seasoning to obtain a reverse mortgage line of credit for example is only 60 days. Proof of occupancy is required. The 60 day wait period is helpful especially if you are a cash buyer! More and more often the HECM is chosen to create a line of credit, and left alone to grow larger for future use.
In conventional lending: Cash Out Refinance, Equity Loan Or Second Mortgage
There are three basic conventional ways to access the equity in your home which are common these include:
- Cash Out Refinance – you refinance your current mortgage and you request cash-out for the equity. For example, if your home is worth $200,000 and you have a current mortgage of $100,000 you may be able to access an additional $60,000 to $70,000 in cash depending on your lender’s requirements.
- Home Equity Loan – a home equity loan is typically a line of credit that you take out with your local bank. These loans are typically what are known as “revolving” where you can access the funds over and over again as you make payments. Home equity loan interest payments are generally not tax deductible.
- Second Mortgage – in order to qualify for a second mortgage on your home, the lender would require you to meet specific credit requirements as well as certain debt-to-income ratios. Generally, new mortgage borrowers will not qualify for a second mortgage.
In most cases, lenders will require borrowers to have had their mortgage at least one year before they are allowed the option of any type of cash-out refinance.
What’s So Special About One Year?
The one year may seem subjective but there are some important things to keep in mind. When you applied for your original mortgage, your lender based their decision on your existing credit.
Before you can take cash out, you may need to demonstrate a history of making your mortgage payments on time, as agreed.
While you may already have a substantial amount of equity in your home, lenders are taking an additional risk if you are allowed to “tap into” that equity. Before you make the decision to access the equity, talk to your lender regarding possible restrictions including prepayment clauses.