Deciding Between Selling Property Outright vs. Second Mortgages vs. HELOCs
3 Ways to Tap Into Your Home’s Equity
If you own a home and need cash, you might be considering tapping into your home’s equity. After all, home equity loans and lines of credit (HELOCs) are popular ways to finance home improvements, consolidate debt and pay for major expenses. And if you’re hoping to sell your home someday, having equity can give you the ability to command a higher sale price.
But before you take out a home equity loan or HELOC, it’s important to understand the potential risks and rewards. Here are three things to consider before tapping into your home’s equity.
Selling Property Outright
If you need cash and want to tap into your home’s equity, one option is to sell your property outright. This option may be especially appealing if you own a paid-off home or you’re otherwise “house rich but cash poor.” When you sell your property, you’ll receive a lump sum of cash that you can use for whatever you want.
Of course, there are downsides to selling your property outright. For one thing, you’ll have to find somewhere else to live. If you don’t have another place lined up, that could mean moving in with family or renting until you can buy another property. Additionally, selling your property will likely trigger capital gains taxes. The good news is that you may be able to avoid paying taxes on your capital gains if you reinvest the proceeds from the sale into another property within a certain time frame.
Getting a Second Mortgage
Another way to tap into your home’s equity is to take out a second mortgage. A second mortgage is a loan that’s secured by your property, just like your first mortgage. The main difference is that a second mortgage comes after your first mortgage in line for repayment if you default on the loan.
Taking out a second mortgage can give you the money you need without having to sell your property outright. And since second mortgages typically have lower interest rates than credit cards or personal loans, they can be a cheaper way to borrow money. However, it’s important to note that second mortgages come with the same risks as first mortgages. If you can’t make your payments, you could lose your home to foreclosure.
Getting a HELOC
A home equity line of credit (HELOC) is another way to tap into your home’s equity without selling your property outright. A HELOC functions like a credit card in that it gives you a line of credit that you can use when needed up to a certain limit. You only have to pay interest on the portion of the HELOC that you use, and you can make payments on the principal as slowly or quickly as you want up to a certain timetable.
HELOCs usually have lower interest rates than credit cards and usually offer tax-deductible interest (unlike personal loans). However, HELOCs also come with risks. If housing prices fall or if interest rates rise, you could end up owing more on your HELOC than your home is worth, leaving you “underwater” on the loan. Additionally, if you don’t make payments on time, the lender could foreclose on your home just as they could with any other type of loan secured by your property.
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