Do I have enough equity to pay for a new roof?
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Dear Credible Money Coach,
I recently lost my job, but I have a decent Social Security income that covers my mortgage. My HOA raised a valuation of $8,300 for new roofs. I need a home loan. My property is valued at $245,000. I owe $80,000. – Jacqueline
Hello Jacqueline, and thank you for your question. Doing a home repair or improvement is a smart reason to tap into your home equity. Home equity interest rates are generally lower than other loans you might consider for a home equity project, such as home equity loans private loan.
Let’s look at how home equity works and how you can access it, including through refinancing.
Whatever method you use Access to your home equityThe first question to consider is whether you have enough home equity to qualify.
Generally, lenders won’t let you borrow more than 80% of your home’s value, although there are exceptions, such as B. VA loan. That means if your home is appraised at $245,000, the maximum you can borrow (including your mortgage and home equity loans) is $196,000 ($245,000 x 0.80).
Since you have an $80,000 mortgage, you have $116,000 ($196,000 – $80,000) of remaining equity. So you have more than enough to qualify for a home equity loan if you choose to pay for the roof appraisal. But you also have other home financing options.
Ways to access your home equity
Tapping into home equity can be a relatively inexpensive way to get cash when you need it. However, since you’re posting your home as collateral, it’s wise to only spend your equity on the essentials. Paying for an HOA appraisal is a good use of equity as it will likely increase the value of your home.
There are several ways to access your equity, including a home equity loan, a home equity line of credit (HELOC), and a refinance with a payout.
A home equity loan is also known as a second mortgage. Like your first mortgage, your home secures a second mortgage. You usually need good credit and a low debt-to-income ratio to qualify.
Interest rates are usually higher for Equity capital Loans because the lender assumes a higher risk. If you defaulted and your first mortgage lender foreclosed on your home, the second mortgage lender might not get paid.
A home equity loan can be a good choice if you know exactly how much you need to borrow.
home equity line of credit
A HELOC is another way to tap into your home equity. It is secured by your home but works more like a credit card than a mortgage. Instead of receiving a lump sum and paying it back in installments over time, you are given a credit limit that you can use for a set “draw period” and then start paying back your balance.
With a HELOC, you only pay interest on the amount borrowed, not the total amount available. home equity lines of credit typically have variable rates rather than fixed rates like a mortgage. That means your interest costs and monthly payments may change over time.
You can opt for a HELOC if you are unsure of the amount you need and want the flexibility to borrow as little or as much as your approved limit.
A Refinance cash out replaces your current mortgage with a new mortgage for a larger amount, allowing you to collect the difference. It’s a good option if refinancing allows you to get a lower interest rate. You can also extend your repayment period to reduce your mortgage payment. Keep in mind that this strategy means you pay more interest over the new, longer term of the loan.
A final word…
Every option I’ve covered comes with closing costs in addition to interest costs such as lending, underwriting, valuation, and other administrative fees.
Tapping into your home equity can be a smart option costs for necessary repairs like a new roof. Just make sure you understand all the terms and costs before taking out a loan against your home.
And it’s a good idea to compare mortgage refinance rates from multiple lenders. With Credible you can easily do this.