Tag: home equity line of credit

How Home Equity Works: Smart Ways to Use Your Home’s Value

Posted on by First Western Trust Bank

Your home isn’t just a place to live—it can also be a powerful financial asset. Home equity, the portion of your home you truly own, can help you achieve various goals, from making renovations to consolidating debt. But what exactly is home equity, and how can you use it wisely? Here’s a beginner-friendly guide to understanding home equity and the smart ways to leverage it.

What Is Home Equity?

Home equity is the difference between your home’s current market value and the balance of any loans secured by the property. For example:

  • If your home is worth $500,000 and you owe $300,000 on your mortgage, your equity is $200,000.

As you pay down your mortgage and your home’s value increases, your equity grows. This equity can be used as collateral for loans or lines of credit, giving you access to funds without selling your home.

Smart Ways to Use Home Equity

  1. Home Improvements
    Investing in renovations or upgrades can increase your home’s value while enhancing your living space. Kitchens, bathrooms, and energy-efficient upgrades often offer the best return on investment.
  2. Education Expenses
    Using home equity to fund higher education for yourself or a family member can be a more affordable alternative to student loans, thanks to typically lower interest rates.
  3. Debt Consolidation
    If you have high-interest debt, such as credit cards or personal loans, you can use home equity to consolidate and pay it off. This approach simplifies your payments and can reduce your overall interest costs.
  4. Emergency Expenses
    Home equity can provide a financial safety net for unexpected medical bills, job loss, or other emergencies.
  5. Starting a Business
    Entrepreneurs may use home equity to finance a new business or expand an existing one, though this involves a higher level of risk.
  6. Investing
    Some homeowners use home equity for investment opportunities, such as purchasing rental properties. However, this strategy requires careful planning and risk management.

Home Equity Loan vs. Line of Credit: What’s Right for You?

If you’re considering tapping into your home equity, you’ll typically choose between a home equity loan and a home equity line of credit (HELOC). Here’s a quick comparison:

Home Equity Loan

  • Structure: Provides a lump sum with a fixed interest rate and set repayment term.
  • Best For: One-time expenses, such as major renovations or debt consolidation.
  • Advantages: Predictable monthly payments and stable rates.

Home Equity Line of Credit (HELOC)

  • Structure: Functions like a credit card, allowing you to borrow as needed during a draw period (usually 10 years), followed by a repayment period.
  • Best For: Flexible, ongoing expenses like home improvements or unexpected costs.
  • Advantages: Interest is charged only on the amount you use, and rates are often lower initially (though they may be variable).

How to Decide If Using Home Equity Is Right for You

  1. Evaluate Your Financial Situation
    Before borrowing, ensure you have a stable income and can comfortably afford the payments.
  2. Consider the Risks
    Borrowing against your home means your property serves as collateral. If you can’t repay the loan, you risk foreclosure.
  3. Research Costs
    Both home equity loans and HELOCs come with fees, including appraisal costs, closing costs, and potentially annual fees. Compare offers from multiple lenders to ensure you’re getting the best deal.
  4. Have a Clear Purpose
    Only use home equity for purposes that improve your financial standing or quality of life. Avoid using it for non-essential expenses, like vacations or luxury purchases.

How First Western Trust Can Help

At First Western Trust, we understand the importance of making informed decisions when it comes to your home equity. Our team of experts is here to help you:

  • Determine how much equity you can access and whether a loan or HELOC is right for you.
  • Navigate the application process with ease, ensuring you understand the terms and costs.
  • Develop a plan to use your equity responsibly and align it with your broader financial goals.

Final Thoughts

Home equity is a valuable resource that, when used wisely, can help you achieve significant financial milestones. By understanding how it works and exploring your options, you can leverage your home’s value to create a brighter financial future.

Ready to explore your home equity options? Contact us today to speak with a financial specialist who can guide you through the process and help you make the most of your home’s potential.

Home Refinancing Strategies in High-Interest Rate Environments

Posted on by First Western Trust Bank

Interest rates remain high for fixed-rate loan mortgages. These market trends could lead to significant increases in monthly payments and debt-to-income ratios for future borrowers. During such times, homeowners looking to refinance a mortgage might benefit from seeking alternative options to traditional fixed-rate mortgages. Through collaboration with a seasoned financial institute, it is possible for homeowners to find lower rates while most of the market deals with a high-interest rate environment. 

However, some transitory refinancing solutions or mortgage products may lead to costly expenses in the long term. Therefore, homeowners must understand each available solution before signing on the dotted line. Buyers can tap into several mortgage refinancing alternatives to minimize the toll of high-interest rates. 

Apply for Adjustable-Rate Mortgages (ARMs)

ARMs are essentially mortgage arrangements that gradually deviate from a fixed interest rate in home loan refinancing. ARMs begin with a fixed interest rate and adjust across a six-month or annual period. While ARMs once had fixed-rate periods of less than three years, these have increased recently to provide improved financing stability.  

For example, a mortgage provider might offer a 7/1 ARM arrangement. Under this agreement, the borrower services a fixed rate for the first seven years and an adjusted final term. In a 3/3 ARM, homeowners service a fixed loan for the first three years and an adjustment for the remaining three years. 

Lending institutions can help guide homeowners through various ARM options based on their needs and priorities. While ARMS offer lower initial payments, it is essential to note that future adjustable interest rates can spike based on market and economic changes. 

Homeowners should check with their lenders regarding exact ARM practices, as some policies offer cutoff amounts that protect against significant interest increases. Also, it is important for borrowers to make the necessary financial plans for servicing higher-adjusted loans that may occur in ARM arrangements. 

Discuss Loan Assumption Options

Buyers who can afford higher cash down payments may consider taking over the remainder of a fixed mortgage term from current homeowners to avoid high-interest market rates. The process, known as loan assumption, allows buyers to take over a property owner’s original term conditions in home loan refinancing. 

However, loan assumptions usually involve substantial paperwork to address various changes that originate from the start of the loan. A trusted lender can help sort through the details, such as accounting for the difference between sales pricing and outstanding loan balances. 

Leverage Home Equity Line of Credit (HELOC) 

A HELOC is an effective method of refinancing home payments during high-interest periods. The revolving loan type allows borrowers to secure a loan against up to 85%–90% of their home equity. According to the Consumer Financial Protection Bureau (CFPB), nearly a million consumers borrowed against home equity in Q2 2022. 

A HELOC offers an adjustable interest rate, where borrowers can tap into the funds via a line of credit for an agreed draw period. HELOC draw periods usually span 5–10 years and depend on financial assessments conducted by the lender, which may include a homeowner’s creditworthiness and the home equity value of a property. 

The HELOC process lets homeowners leverage their equity without replacing current low-interest mortgages with higher-interest cash-out refinances. While HELOCs can help homeowners leverage their equity in high-interest environments, these lines of credit carry some risks. 

It is important to discuss other potential risks and fine print associated with the loan type with a trusted lender before proceeding with the arrangement. For example, since HELOC relies on home equity, borrowers face the danger of foreclosure if they fail to repay the loan based on agreed-upon terms. Also, buyers may feel tempted to borrow additional funds from their HELOC for personal spending, resulting in debts and financial challenges down the road. 

Consider Temporary Interest Rate Buy-Downs

Financial institutions may recommend a temporary buy-down for home loan refinancing in high-interest environments. A temporary buy-down usually involves an additional initial payment in exchange for lower interest rates down the mortgage life cycle. Lenders may extend the discounted interest rate for a few years before reverting to the original values. 

For example, a borrower might request a buy-down at 3.5% for the first two years of a 15-year mortgage loan with a 5% interest. When opting for a buy-down, it is essential to consider factors like the total upfront cost and buy-down period to determine the best long-term outcome. 

Broaden Refinancing Options

Owners may go beyond mortgage refinance options in home loan refinancing by exploring different sales transactions. For example, individuals may consider contract-for-deed arrangements and private mortgages, where sellers and buyers negotiate the interest rates and related terms between each other for a property transaction. These privately settled arrangements may also include late payment provisions and penalty arrangements. 

Engaging in these unconventional financing options requires close attention to the legal agreements to avoid balloon payments and other factors that could result in high-interest rates in the long run. 

Final Thoughts

First Western Trust offers mortgage services for optimized outcomes across different settings, including high interest rate environments. The experienced team applies years of expertise to personalize banking services and diversify investment portfolios for enhanced wealth planning and strategic methods to refinance home loans. Those who partner with us have access to maintaining a loan within our portfolio loan program. Being a part of our program allows us to underwrite cash flow and be more creative than most brokers which can make a significant difference in helping you obtain the right loan to meet your needs.
Reach out to First Western Trust’s mortgage team to discover the most suitable strategies to refinance your home today.