| Cashing Out Your Equity ¨C How Much Is Enough? |
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Many property owners have the ability to cash out their equity. Rising home
values have allowed people to tap into their equity to generate thousands or
tens of thousands of dollars.
Lenders often allow a borrower to cash out
up to 100% or even 125% of the value of a property.
Here is some help in
deciding how much of a cash out is right for you.
Basics
You can
cash out your equity into a new mortgage loan. There are many loan options,
including:
30 year fixed
Interest only loans
Minimum payment
cashout
30 Year Fixed Mortgage
This type of loan has the
advantage of interest rate stability. It is usually the most expensive because
the interest rate is the highest and the monthly mortgage payments are the
largest.
This type of loan may be of limited value to someone who
intends to sell the property shortly. You don't need a 30 year fixed loan if you
are only going to keep the property for one more year.
Interest Only
Mortgage
An interest only mortgage allows a borrower to make a lower
payment than is normally allowed. An interest only payment keeps the principal
balance the same the loan size does not go up or down. This may be appropriate
for borrowers who do want a lower payment on their monthly mortgage but do not
want negative amortization on their property.
Minimum Payment Loan
This type of loan is a mortgage where a borrower has the option to pay
less than an interest only payment. This results in a very low mortgage payment.
This type can help someone who wants to have the lowest possible payment.
The advantage of this loan type is that it helps a borrower's monthly
cash flow. The disadvantage of this loan is that if you make a minimum payment
the amount lower than an interest only payment is added onto your principal. For
some borrowers this is acceptable, especially if they believe the value of the
property will continue to increase.
How Much Is Enough?
A
borrower should use their equity carefully. It can be helpful to pay off higher
interest rate consumer debt such as credit cards or car loans. Using the equity
for other extravagances such as boats or traveling may not make as much sense.
Consumer debt that is consolidated into a mortgage loan may convert the
debt's interest payment into a tax deductible item. Check with your tax advisor
about this. |
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