Home Equity Loan

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Have you considered using the equity in your home to pay off some of your debt, complete home improvements, cover emergency expenses, or continue your education? Now might be the right time to take a closer look! What exactly is a home equity loan? A home equity loan is a type of second mortgage that allows you to borrow the difference between what your home is worth and what you owe on your mortgage.

For example, if you have a home value of $300,000 and owe $200,000 on your mortgage, then your home equity equals $100,000. This is the amount you would be able to borrow as a lump sum with a fixed rate. Just to clarify, you would pay back the loan in fixed monthly payments over a set period of time. Keep in mind there are a few risks associated with home equity loans. Not only should you take into consideration your debt load and the current interest rates, but more importantly your home is collateral for the loan. 

Contact Us Today! 

Is a home equity loan right for you? Contact us today to find out more about home equity loans, as well as other ways to use debt to your advantage.

Free Tools For You! 

We also have free tools available! Download our Cash Out Refi vs Home Equity Loan Calculator to see which option is best for you! 

Learn more!

Visit our YouTube channel to learn more about using debt instead of letting debt use you! 

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How to Calculate a HELOC Payment

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Today we are going to not only discuss what a HELOC is but we will also walk through the process of how to calculate a HELOC payment. Let’s get started.

What is a HELOC?

First and foremost, what is a HELOC? A HELOC is a mortgage on your house. However, it operates like a credit card. Just like credit cards, a HELOC allows you to borrow money and then pay it back. Just to clarify, you can borrow money for anything that you need during the draw period. On average, the draw period lasts between 5 to 10 years. Once the draw period ends, the repayment period begins.

How do you calculate payments?

First: What’s your starting balance?

Second: What’s your interest rate?

Third: Grab a calculator

Fourth: Calculate your annual payment. (Balance x Interest Rate)

Final: Calculate your monthly payment (Annual payment/12 months)

Let’s look at an example.

Starting Balance: $50,000

Interest Rate: 8%

Annual payment: $50,000 x .08 = $4,000

Monthly payment: $4,000/12 = $333.33

We are here to help! 

Here at Smart With Debt we want to help you get on the right path. Download our HELOC Payment Calculator for free today! Do you have more questions regarding a HELOC and determining if it is right for you? Contact us today! Learn more about how to calculate a HELOC payment in our most recent video.

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Cash-Out Refinance: Avoid the $250,000 Blunder Most People Make

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Are you thinking about a cash-out refinance? While it might seem like a great idea to free up some cash each month, it creates further financial strain in the future. Therefore, before you jump in, let’s look at the numbers in order to see how this decision could cost you a whopping $250,000 over time. Let’s begin by looking at the average debt provided by Dave Ramsey. 

What is a Cash-Out Refinance?

To clarify, a cash-out refinance allows you to take out a new mortgage for more than you currently owe, as well as pocket the difference. It’s tempting if you’re looking for some extra cash or want to consolidate debt. However, in today’s market, with interest rates climbing, you might be setting yourself up for a costly surprise.

Cash-Out Refinance
New Loan Interest Rate Monthly Payment New Total (Current Payment $2,669 – Cash-Out Refinance $1,962)
New Mortgage Balance $295,000 7% $1,962 $707 (Monthly Relief)

Cost of Cash-Out Refinance
Monthly Payment Remaining Number of Payments Cost Over Loan Life Additional Money Out of Your Pocket!

 (Refinance Cost $706,550 – Total Cost Previously $454,591 
$1,962 360 $706,550 $251,959

What is a Home Equity Loan?

A Home Equity Loan, on the other hand, is a type of loan where you borrow against the equity you’ve built up in your home. To put it another way, it’s a second mortgage with a fixed interest rate, a set repayment term, as well as consistent monthly payments. Unlike a HELOC, which acts like a credit line, a Home Equity Loan gives you a lump sum upfront that you repay over time. Therefore, it is a stable option for consolidating debt or financing big expenses.

Home Equity Loan
New Loan Interest Rate Home Equity Loan Payment  + Mortgage New Total (Current Payments $2,669 – Mortgage with HEL $1,959)

(Credit cards and auto loan paid off)
Home Equity Loan  $57,500 9% $793 + $1,166 = $1,959 $710 (Monthly Relief)

Cost of Home Equity Loan
Monthly Payment Remaining Number of Payments Cost Over Loan Life + Mortgage Additional Money Out of Your Pocket!

(Home Equity Loan Cost  $461,249 – Total Cost Previously $454,591 
$793 105 $83,287 + $377,962 =

$461,249

 $6,658

Monthly Payment Relief: What Does It Really Cost?

Sure, both options give you that monthly payment relief you’re looking for, however, only one of them doesn’t mortgage your future. Therefore, by choosing the home equity loan over the cash-out refinance, you will not only save big now, but in the long run as well. 

Out of Pocket Difference Between the Two Options 
Cash Out Refinance $706,550 $245,301
Home Equity Loan $461,249

Bonus: Short-Term Impact

Some people say they won’t keep their mortgage for 30 years. However, the financial impact of a cash-out refinance can be seen after just one year! 

BONUS: Cash Out Refinance: Cost By Year 
Year Cost 
First Year $12,975
Third Year $26,987
Fifth Year $42,894
Tenth Year $80,679 + $11,898 = $92,577

Your Best Option in Today’s Market

In today’s market, a home equity loan is often the better choice. It not only provides the monthly relief you need, but it also doesn’t cost you a fortune in the long run. Remember, it’s not just about getting by today, it’s about protecting your future, too. 

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Cash Out Refinance: Good or Bad Idea in Today’s Market?

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Cash Out Refinance: Good or Bad Idea in Today’s Market?

Are you thinking about a cash out refinance and wondering whether or not it’s a good idea in today’s market? While many people see ads promising extra cash and lower monthly payments, it’s important to consider whether or not it’s the best choice for you. On the one hand, a cash out refinance can provide immediate funds for various needs. However, on the other hand, it can also come with significant risks, as well as additional costs. Therefore, it’s crucial to weigh the pros and cons before making a decision. So, let’s dive in and examine the details.

What is a Cash Out Refinance?

First and foremost, what is a cash out refinance? A cash out refinance lets you replace your current mortgage with a new one. To clarify, the new mortgage will be for more than what you currently owe, because you are taking cash out of the equity. For example, if you owe $200,000 on your home and get a new loan for $250,000, you will be getting $50,000 in cash.

The Appeal

  • Extra Cash: You can use the extra money for anything that you need.
  • Debt Consolidation: Combine high-interest debts into one lower-interest payment.
  • Home Improvements: Increase your home’s value with updates.

The Risks

  • Higher Interest Rates: Interest rates are higher than they used to be. Therefore, if you refinance now, you could end up with a much higher rate. This means your monthly payments could as a result be bigger as well.
  • Cost Over Time: Refinancing costs money. Not only are there closing costs, which can add up fast, but you might end up paying more over the life of the loan as well. Even if your monthly payment goes down, the total amount you pay could be a lot more.

Are there Better Alternatives?

So, what should you do instead? A home equity loan is a great option. It not only allows you to keep your current mortgage, but it also adds a second loan. Therefore, by using the equity in your home, it will not change the terms of your current mortgage. Another option is a Home Equity Line of Credit (HELOC), which works like a credit card. To clarify, a HELCO allows you to borrow what you need when you need it, and only pay interest on what you borrow. Both options provide the cash you need, while protecting your financial future.

  • Home Equity Loan: This allows you to keep your current mortgage and add a second loan. The interest rate on the home equity loan is fixed, so your payments stay the same.

  • Home Equity Line of Credit (HELOC): A HELOC works like a credit card. The interest rate can vary, but you only pay interest on what you borrow.

Cash Out Refinance vs. Home Equity Loan

Cash Out Refinance Home Equity Loan
Interest Rate Usually higher in today’s market Typically lower than cash out refinance
Monthly Payments New payments based on higher loan amount and interest rate Fixed payments on a second loan
Loan Term Extends mortgage term to 30 years Separate term, usually 5-15 years
Closing Costs High closing costs (2-5% of loan amount) Lower closing costs compared to cash out refinance
Access to Funds Lump sum received at closing Lump sum received at closing
Impact on Existing Mortgage Replaces existing mortgage with a new one Keeps existing mortgage intact
Total Cost Over Time Potentially higher due to interest over a longer term Generally lower total cost
Risk of Losing Home Higher, as you’re resetting your mortgage Lower, as your primary mortgage remains unaffected

Example: Jack vs. Jill

Jack (Cash Out Refinance) Jill (Home Equity Loan)
New Loan Amount $295,000 $90,000
Monthly Payment $2,000 $2,000 (mortgage + new loan)
Total Payment Over Loan Term $720,000 $476,000
Additional Cost Over Existing Debt $244,000 Minimal, as it adds to the existing debt separately

This comparison shows the financial impact as well as the potential risks of each option. More importantly, by considering these factors, you can make a more informed decision that aligns with your financial goals.

Conclusion

In today’s market, a cash out refinance might seem tempting, however it’s often a costly mistake. Higher interest rates as well as long-term costs can outweigh the short-term benefits. Instead, consider a home equity loan or a HELOC. Both of these options can give you the cash you need without risking your financial future. Most importantly, remember to think long-term and choose the best option for your situation. Stay smart with debt!

Contact us today to learn more about your options in order to determine which path would be best for you!

Watch our most recent video to find out more!

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Is a HELOC a Mortgage?

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Today we will be answering the question, “Is a HELOC a mortgage?” Let’s begin by exploring what a HELOC is. A HELOC stands for Home Equity Line of Credit and is a type of loan. However,  instead of getting all the money at once, you can instead borrow as you need. It works like a credit card. You have a limit and only pay interest on what you borrow.

How Does a HELOC Work?

  1. Equity Check: First, you need equity in your home. Equity is the difference between your home’s value and what you owe on it.
  2. Get Approved: You apply, and if approved, you get a line of credit.
  3. Draw Period: You can borrow during the draw period, which is usually 10 years.
  4. Repayment Period: After the draw period, you enter the repayment period. This can last 20 years. During this time you pay back what you borrowed, plus interest.

Is a HELOC a Mortgage?

Yes and no. Let’s break it down.

How They Are Similar:

  1. Secured by Your Home: Both HELOCs and mortgages are secured by your home. If you don’t pay, you could lose your home.
  2. Interest Payments: You pay interest on both.
  3. Approval Process: Both need approval. Lenders will look at your credit, income, and home value.

How They Are Different:

  1. Upfront Money: A mortgage gives you a lump sum. A HELOC on the other hand lets you borrow as needed.
  2. Use of Funds: Mortgages usually buy a home. HELOCs however can be used for anything, such as home repairs, education, or paying off debt.
  3. Repayment Terms: Mortgage payments are fixed, whereas HELOC payments can vary based on how much you borrow.

Pros and Cons of a HELOC

Pros:

  1. Flexibility: Borrow what you need when you need it.
  2. Lower Interest Rates: Usually lower than credit cards.
  3. Tax Benefits: Interest may be tax-deductible.

Cons:

  1. Variable Rates: Interest rates can go up.
  2. Risk of Losing Home: If you can’t pay, you might lose your home.
  3. Temptation to Overspend: Easy access to funds can lead to overspending.

When to Use a HELOC

  • Home Improvements: Boost your home’s value.
  • Debt Consolidation: Pay off high-interest debt.
  • Emergency Funds: Have a backup for unexpected costs.

Conclusion

A HELOC is a useful tool. It’s similar to a mortgage in some ways but different in others. It gives you flexibility and access to funds when you need them. Keep in mind,  it’s still a loan secured by your home. By using it wisely you can enjoy the benefits it offers!

Contact Us Today!

Do you need help navigating your financial future? Contact us today!

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