Category: Loan Types

A mortgage term is how long it will take you to repay the loan in full. There are a few term options, but most common are 15 or 30-year terms.

Both mortgage options are fixed rate meaning the interest rate and monthly payment is set when the loan is taken. A fixed-rate makes it much easier for a borrower to budget since they know exactly how much the minimum payment is each month for years to come.  No matter what happens with interest-rates, the minimum payment won’t change.

30-year mortgages are by far the most popular mortgage product for American homebuyers – Freddie Mac says 90% of all loans are 30-year fixed. What makes them so appealing? Are there any benefits to a 15-year fixed?

30-year mortgage
Because the term of the loan is longer, there is a higher chance the borrower will default over time, so it’s a riskier option for lenders. But the payoff for borrowers is big – substantially lower monthly payments than a 15-year mortgage.

A lower monthly payment makes homeownership a possibility for more Americans and it may allow some people to purchase more home than they’d be able to with a 15-year fixed. Even borrowers who could afford to make larger payments may choose a 30-year fixed and re-invested or put away the money they’re saving to further their financial stability.

The catch? You’ll save money each month, but you’ll be paying your mortgage for longer. And, in the end, you’ll end up paying much more in interest than you would with a 15-year loan for the same house.

15-year mortgage
Lower monthly payments sound great, so why would anyone get a shorter loan term? Borrowers often choose a 15-year loan because they pay off the loan much faster and with less interest overall. Take the example below.

The monthly payments are nearly $700 more per month, but over the course of the loan, the borrower saved $83,880. If you can afford a bigger payment, looking into a 15-year fixed mortgage may be a good idea.

Because there’s less time for the loan to be exposed to risk, interest rates for 15-year mortgages are usually lower than that of 30-year fixed. The rate can be around a quarter to a whole percentage point less.

How about something in-between?
If you like the lower payments of the 30-year mortgage but the faster payoff of the 15-year mortgage, consider getting something in between like a 20-year mortgage. There are a lot of different options when it comes to home loans. It’s best to speak with a local loan expert to see what would work best for you and what your payments would be like with each option. Together, you can find the best path forward for your financial goals.

A home equity line of credit (HELOC) uses the equity you’ve built in your home as collateral to get an additional loan. Since you’re using your home as collateral, lending institutions generally are able to offer much more favorable interest rates than you would get from an unsecure borrowing source (like a credit card company).  

How much money can you get from a HELOC?

Each lending institution has different guidelines that dictate how much they can lend you. Their guidelines are usually based on your loan-to-value ratio (LTV), which is the amount of principal on your mortgage compared to your home’s appraised value. Most often, you’ll need at least 20% equity in your home (which is a LTV of 80%) to qualify. As example, if your home’s current value is $300,000 and the remaining balance on your mortgage is $250,000, you would have an LTV of 83%. For many lending institutions, you would not qualify for a HELOC.  

However, if your home’s current value is $300,000 and the remaining balance on your mortgage is $175,000, your LTV would be 57.9% and you would normally qualify for a HELOC for up to 80% of the equity in your home. In this example, you may have access to $65,000. 

Be aware that many lenders won’t give you a HELOC for less than $25,000.  

How do you get the cash?

Much like a credit card, you’ll have a revolving line of credit available. You can access your funds through an online transfer, a check, or a credit card. As you borrow more from your line of credit, your payments will increase though the rate of interest will remain the same.  

When Do You Pay Back HELOC Funds?

Most have two phases. The first is the “draw period” which may last years (often up to 10) during which you can access your available credit. During the draw period, you’ll make monthly interest-only payments on the funds you withdraw. At the start of the second phase, you’ll no longer have access to your funds and you’ll have to start making regular principal-plus-interest payments until your balance is $0. Most lenders allow the second phase to last around 20 years. 

Benefits of a HELOC

Even if you get a HELOC, you don’t have to use the funds. As long as your lender doesn’t require you to do minimum draws, it could be a good source of emergency cash or a temporary safety net. If you do need to use the cash, the interest rates are lower than the rates tied to credit cards. 

Cons of a HELOC

The rate on your HELOC might fluctuate, and if it goes too high, you may have a hard time paying off your interest. Furthermore, your lender may decide to reduce your line of credit if your home’s value takes a drastic dip. And, don’t forget your overall debt load will increase with a HELOC or any other second mortgage. 

Is a HELOC right for you?

If you have enough equity built into your home and need cash for a home improvement, to cover medical bills, to pay off credit cards, or to sustain your lifestyle after losing a job, a HELOC might be a great solution. To find your home’s current value and how much you could get from a HELOC, contact your local Mann Mortgage expert today. 

Alternative options

One potential alternative is a cash-out refinance, which you could also use to pay for a home renovation or to pay off credit card bills. Learn more about cash-out refinances. If you have questions on HELOCs or other programs that will let you leverage your home equity, please get in touch with one of our local mortgage experts today.

So What is a cash-out refinance?

A cash-out refinance is a type of loan where a borrower has a mortgage they are currently paying off and they replace it with a new mortgage for more than their remaining principal. The difference between the principal balance of the first mortgage and the new one is given to the borrower in cash.

Cash-out refinance vs a standard refinance

In a standard refinance, borrowers work with their lender to get a lower rate of interest or a new payment schedule. Once the standard refinance is secured, they have a new monthly payment amount based on the new agreement – but their balance on the loan remains the same. In a cash-out refinance, a borrower works with their lender to pay off their home’s mortgage balance with a new loan based on their home’s current value. The difference between the original mortgage the borrower is paying off and the new loan is kept by the borrower. In order to have some equity in their home, most cash-out refinances limit the amount a borrower can receive at 80-90% of their home’s equity in cash (VA refinances don’t have this requirement).

In other words, don’t expect to pull out all the equity you’ve built into your home. If your home is valued at $350,000 and your mortgage balance is $250,000, you have $100,000 of equity in your home. You could do a cash-out refinance of somewhere between $80,000 to $90,000.

Benefits of a cash-out refinance

If interest rates are at a new low, you have equity built into your home, and if you would like cash on hand to pay off high-interest credit cards or fund a large purchase, a cash-out refinance is something you might want to consider.

Cons of a cash-out refinance

There are fees involved in a cash-out refinance, and you’ll have to make sure your potential savings are worth the cost. Like any refinance, you’ll pay closing costs of around 2% to 5% of the mortgage. And if your lender allows you to take out more than 80% of your home’s value, you’ll have to pay private mortgage insurance (PMI). Freddie Mac estimates most borrowers will pay $30 to $70 per month for every $100,000 they borrowed.

And, don’t forget your overall debt load will increase with a cash-out refinance.

Alternative options

One potential alternative is a home-equity line of credit (HELOC), which you could also use to pay for a home renovation or to pay off credit card bills. Learn more about what HELOCs are and how they work.

Should you get a cash-out refinance? If you have enough equity built into your home and you get a great rate, they might be a great solution for a home improvement or renovation. To find out what the current rates are and to check your home’s current market value, contact your local Mann Mortgage expert today.