Tapping home equity

[Ambulance Chaser]

I was thinking of tapping into my home's equity to help fund its renovation. Does anyone have experience with home-equity lines of credit and/or cash-out refinancings? Which is preferable?

 

[retronotmetro]

You are a brave soul to pull out equity in the face of bubble-burst warnings.

I have a HELOC that I have not drawn on--I got one to serve as a cash flow safety device since I have a lot of equity. If you do not have a sum certain that you need to pull out, a HELOC might be preferable to doing the refi because you won't be locking in an increased monthly payment for the life of the loan. Having the HELOC available does require some discipline, though.

 

[Full Canvas]

Originally Posted by Ambulance Chaser

I was thinking of tapping into my home's equity to help fund its renovation. Does anyone have experience with home-equity lines of credit and/or cash-out refinancings? Which is preferable?

Typically, Home Equity Lines of Credit (HELOC) are tied to the current Prime Rate and the total interest rate of a HELOC is calculated by adding another two percent. Since the Prime Rate is currently 7.50%, HELOCs are actually at 9.50%. It's quite likely that the Federal Reserve Bank will increase the Fed Funds Rate incrementally by late this year. That will pave the way for the Prime Rate to increase. HELOC rates will thereby increase. Don't be surprised if, by year's end, to see HELOC rates at or above 10.00%.

A cash-out refinance is likely your best course if you can qualify for a sufficiently low interest fixed-rate loan. This ultimately depends upon other loan detail factors such as the Loan-to-Value Ratio (LTV), and amount of cash-out. Depending upon how long you intend to occupy the property and what your renovation adds to current value, you may decide a fixed period of 5, 10, 15, 20, 30, or 40 years is best for you. 50 year loans are on the horizon.

When (not "if") our economy finally loses steam, we may experience something akin to the Stagflation of the mid-1970s. I cannot imagine anyone being pleased with their HELOC interest rate in a rising interest rate scenario while property values and wages are stagnant.

Any cash-out you don't use from cash-out refinance proceeds can be parked in Treasuries to provide some very modest offset to the mortgage interest rate. With a good FICO score and certain other things in your favor, it is still possible to get a mortgage with a fixed rate below 6.00%. Each case is different. All lenders are NOT the same. All so-called Loan Officers are not the same. Use common sense and caution. Ask questions. If you have a challenging credit history, there are other strategies to consider.
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