1. Leverage your Home Equity 

X2 Mortgage is about helping people capitalize and make smart decisions with their money, so talking about home equity and what it can do for you is a no-brainer. What is Home Equity? It is the difference between what your home is worth and the amount you owe on your mortgage- the portion you own outright.

When you buy a home, you put money on your mortgage and start making payments. Part of that payment goes toward the principal, and that part means you own that amount of your home. This is why buying a home is better than renting because after you start building capital on your home, you can use that money in advantageous ways. 

Leveraging your home equity opens up options, and in this blog, we are going to break down five different ways you can use your home equity to reach your financial goals, get out of debt, and possibly even expand your portfolio. 

 

2. Home Equity Influencers

Current Market Value

Many factors influence home equity, the number one being current market value. Current market value is what your home is worth in the current real estate market. Many people focus on interest rates when it comes to buying a home, but one must also consider the current real estate market and how property grows in value year after year. Today, homes have skyrocketed in value since 2012 and will continue to do so. According to Yahoo Finance, the average home price in the US has grown from 140,000 in 2012 to 340,000 in 2023.

The sooner you get a home, the higher the chance you have of your equity growing. This is because the more people there are to buy a home (demand) the higher the property is worth. 

As they say, “Marry the house, date the interest rate– Market trends and interest rates aren't something you can control, but buying a house is. 

Property improvements 

Another thing that influences the amount of equity in your home is property improvements. Very often, investors will buy a home at a low price if it needs a lot of work and will do home improvements like plumbing, roofing, and flooring. After the upgrades, an appraiser will come out and compare the property to other properties similar in that area. The appraiser is trained to see what improvements increase the value for when it is next sold. This is not only an option for investors, but improving things in your home is a great tool for everyday homeowners to increase their home's value. 

 

Mortgage Payment Schedule

The third factor influencing home equity is the frequency of paying your mortgage payments. Did you know that if you pay bi-weekly on your mortgage, instead of monthly, you technically pay one extra payment a year on your mortgage, which dramatically decreases interest payments off the life of your loan? This means more cash towards your principal and more money in your pocket. If you are not into that, simply staying current on your payments increases the chance that you will expand your equity over the term of your loan. 

 

3. Financial Tools to Access Home Equity

Now that you know what can increase your equity, let’s learn to maximize it! 

The first and most common way to use your equity is a Home Equity Loan, or a (HELOAN). A HELOAN also has other nicknames, such as a home equipment loan, home equity installment loan, or equity loan. All of these names mean ‘a second mortgage’. This loan is on a second lien, which means it’s not in place of your current mortgage or interest rate but is against whatever equity you have gained in your property. Your house is still collateral in a home equity loan, which is important to consider, as personal loans or credit cards do not put your home at any risk. However, home equity loan interest rates are much lower than credit cards and can be used to consolidate debt and other home improvement projects that we will discuss later on. 

If you want to get your bearings before calling your X2 Mortgage loan officer, you can figure out if you have any equity by a simple equation. You first figure out your LTV, or loan to value. As a reminder, this is how much of your home you own–the loan amount compared to the market value. To figure this out is simple: you divide the loan amount by the value of the home and find the percentage. Once you know the percentage, you can see if you reach the qualification standard of around <80% LTV. 

For example, let's say your loan amount, or the amount of your existing mortgage, is $520,000. Your home market value may be $800,000. You would take the difference and multiply by 100 to figure out the percentage: 

520,000/800,00=.65 x 100=65%.  

This means you have 65% LTV, and you are one step closer to qualifying. For a HELOAN, you qualify off CLTV Combined Loan To Value, which is the amount you are taking out as well as your current mortgage. This is to make sure you can make payments on both. Your loan officer will do this calculation which will determine what you qualify for. 

Fast HELOAN facts: 

- Has fixed rates that do not change during the life of the loan. 

- Interest rates are usually a bit lower than HELOC

- No interest-only option. 

- You take cash out in one installment and pay it back monthly, like your first mortgage.

- Around 80% LTV

- 5-30 years terms

 

Home Equity Line of Credit (HELOC)

HELOCs are similar to HELOANs, as they are also collateral against your house, but instead of one installment upfront, you draw upon your ‘line amount’ like a credit card. When you first apply for a loan, you qualify for a certain line (max) amount and then pay it back monthly. However, every 3 years or so, you have the option to draw, or take out, more, and then continue to pay it back, and so on. 

For example, let's say again that you owe $520,000 your home is worth $800,000. You want to take a line amount of $100,000. You can draw as much as you want out, but it's common to take 80-100k when you first get your loan. Let’s say in 5 years you pay your line amount down to $40,000, but now you want to put in a garage on your home. You still have 60,000 with your line amount to take out and when the time is right, your lender will give you the 40,000 to start your project. 

Fast HELOC facts: 

- Most lenders have adjustable rates, but X2 mortgage offers a fixed rate option. 

- Some have an interest-only period for the first year, which can help with monthly payments. 

- You take cash out when you close, and have the option to draw more every 3-5 years. 

- You also qualify off CLTV

- 5-30 year terms

 

Reverse Mortgage

The Reverse Mortgage is a unique way to get some capital, and is helpful to millions of people in the U.S. This is a loan that lets homeowners who are 62 years and older draw on their home equity. The bonus? It doesn't require borrowers to pay back any money until the loan is refinanced or sold. What happens if the home is sold or the homeowner passes away? The lender will talk to the heirs and give them a time frame to decide what they want to do with the property– to sell or refinance the mortgage into their name. 

To recap, It's called a reverse mortgage because the borrower is getting payments from the lender instead of making payments to them, like pouring water out of a cup, not back into it. 

Fast Reverse Mortgage Facts

- There are three main types of reverse mortgages to fit various borrower situations.

- You can receive the equity in a lump sum, or receive monthly payments, quarterly payments, or as a line of credit. 

- Acts like a HELOAN or HELOC but you keep the money and don't pay it back. 

- LTV can be >50%

- The borrower must be able to pay property taxes and insurance.

 

Cash-Out Refinance

A cash-out refinance is replacing your existing mortgage with a new, larger mortgage and taking the difference in cash. There are many different kinds of refinancing, but this one specifically allows you to change your rate to better market conditions as well as get cash in hand. You can re-arrange your current terms in the loan–like changing your adjustable interest rate to a fixed rate and can shorten or extend the loan’s term (15 or 30 years). 

Fast Cash-Out Refinance Facts

- While you do get cash in hand, it increases your mortgage loan balance and (sometimes) your monthly payment at closing.

- You start your mortgage over. 

- You do have closing costs and fees with a cash-out refinance.

- LTV is usually around 80%

- Great idea if you plan on staying in your home long term. 

 

FHA cash-out refinance

This is important to note that the FHA cash-out refinance is different from the traditional one in terms of qualification standards. FHA requires a lower credit score, and can even refinance borrowers in negative equity positions. 

Fast Cash-Out Refinance Facts

- At least 12 payments (one year) must have been paid to refinance.

- There are two types of rehabilitation refinances, the 203(K), which are used for remodeling and repairs only.

- Nonprofit agencies are not eligible for cash out. 

- Possibility of UFMIP refund in three years

 

 

5. Strategies for Using Home Equity Wisely

Debt consolidation 

There are so many different tools to get your equity, now let's talk about the fun part: what you can use your equity for. The first and most common reason is debt consolidation. When you get your equity loan, or your HELOAN for example, you will get a lump sum at closing. Either you or your title company will pay off your debts, such as credit cards, student or personal loans, or even cars. The terms are incredible compared to credit card terms which make it difficult to get any money towards the principal. Besides lower interest rates, you simplify your life by paying one payment to one place, and you also have potential to raise your credit score and decrease your Debt to Income Ratio. 

 

Home renovations

The second most common reason to get your equity out is to increase property value through home renovations. It’s important to know your goals and keep in mind how long you are staying in your home as one would think that putting a lot of money into a pool or AUD would add a lot of value, but it depends on your appraiser and where you are located. 

 

Build Real Estate Portfolio 

The third equity utilization technique is to start building your investment portfolio. The most common investments that equity loans fund are real estate investment properties. There are some risks involved, but if you have a lot of equity in your home, you can take the cash out (or get a HELOC) and put the funds down on another property, to get some residual income. 

Not into real estate investing? You can also put the cash in stock and bond investments, or save it for emergency funds for a later date. 

 

6. Risks and Considerations

With all loans, there are risks and considerations, or pros and cons, and you must do a cross-analysis of your goals and situations.  

Potential pitfalls with any equity loan are putting yourself in the situation of using your home for collateral. That means, if you don't pay your mortgage, HELOAN, HELOC, or refinance, you would be at risk of foreclosure and your lender would take your home. Not only do you have to understand what kind of loan you are getting and all the terms associated, but you have to know yourself. If you are an impulsive spender, maybe a HELOC might not be the best choice for you, as you can max out quickly and may get yourself into another negative financial situation.

 On the other hand, not all potential risks are in your control either: sometimes, due to market fluctuations, your home can go underwater and you can be in a negative equity situation. Experts have been refining the process for decades alongside the CLTV calculation and other qualification standards so this doesn't happen, but sometimes things happen. 

When you are considering capitalizing on your equity, It’s very important to speak with an experienced loan officer and possibly a financial planner, as they will be able to help you decide what loan is best for your financial goals. 

 

8. “Cash out on three!”

As I hope you can see, leveraging home equity creates opportunities for cash flow and increased financial stability. Any qualified borrower can access their home equity through HELOANS, HELOCs, or cash-out refinances. Specific buyers over the age of 62 can draw on their equity without monthly payments with Reverse Mortgages, and FHA homeowners have many options for property improvements or debt consolidation. 

 

Talk to a mortgage professional today to discover how your financial situation can bring you substantial benefits, such as reduced stress, improved financial well-being, and the achievement of your investment goals.