Using Your Equity to Increase Your Home’s Value

Using Your Equity to Increase Your Home's Value Owning a home has many advantages. One of the biggest ones is being able to accumulate equity with every payment that you make.

Your home equity is simply the amount of money that you have personally invested in your home, beyond what you owe to the lender. At first glance, this money may seem inaccessible while you still own your house. However, you can access it using home equity loans, which help pay for projects that add value to your property.

How Do I Determine My Home’s Equity?

The first thing that you need to know is your property’s full value. In some cases, a professional home appraisal must be done before a lender will approve you.

By subtracting the amount of money that you still owe on the mortgage loan from your home’s total value, you will arrive at the amount of equity you have.

For example, let’s say your home is appraised at $200,000 and your mortgage amount is $150,000.

$200,000 less $150,000 = $50,000 equity in your home

Lenders tend to take this one step further by figuring out your loan to value ratio. This is done by dividing the amount you owe on the home by the current value. This percentage amount is then compared to their standards for issuing loans.

$150,000 divided by $200,000 = 75% loan to value ratio

In most cases, a second mortgage combined with the first home loan should not total more than 75-80% of the overall value of your home. This minimizes the risk to the lender and helps to ensure that you can afford to pay back the loan if you were to default.

Let’s say your lender allows 80% loan to value ratio.

$200,000 x .80 = $160,000 maximum amount allowed

$160,000 less $150,000 current loan amount = $10,000

In this case, you can borrow $10,000 against your equity.

What Is a Second Mortgage?

You may hear of a home equity loan being referred to as a second mortgage. This is because it is simply a new type of home loan that you can apply for after you have earned equity in your home.

A second mortgage uses your home equity as security that you will pay it back. The terms of these loans tend to be shorter than initial mortgages. Most are required to be paid back within 10 to 15 years.

What Is a Home Equity Line of Credit?

Refinancing a Home LoanA home equity line of credit differs slightly from a second mortgage by not being issued in one lump sum. Instead, you can draw from this line of credit, as needed, over a period of time, such as 5-10 years.

In the first stage of the loan, you will typically only make payments on the interest until it is fully funded. After the initial period is over, it then works like a traditional second mortgage, where you pay on both the interest and the principal.

The advantage of this type of loan is that you have more control over how much money is issued at once.

Using Equity to Increase a Home’s Value

Since your home equity serves as collateral for this loan, it is best to focus on projects that increase its value.

A kitchen or bathroom remodel are common options that bring you a better quality of life, while also making your home more valuable.

Exterior repairs, universal design conversions, and upgrades to home heating and cooling systems are other common reasons why people use their equity to obtain a second home loan.

When done correctly, using home equity loans to increase your home’s value can increase your equity over time. Remember that these loans should always be handled using smart choices, such as making long-term investments in your property.

Our loan specialists can also help you identify strategies to get the best rates on your loan, so that your payment is affordable and you’ll feel good about your decision.

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What Are the 3 Main Types of Home Loans?

Types of Home LoansAs a home buyer, knowledge is power, and one of the first questions people ask us is about the different types of home loans.

While most people understand that the interest rates can vary on home loans, they are often unsure of how to sort through the various benefits and drawbacks of each type of loan to find the right one that works for their situation.  

These 3 types of home loans help to break down your options so that you have a better idea of what to talk about when you sit down with your loan officer. 

 

Fixed and Adjustable Rate Loans 

Out of the 3 types of home loans, understanding the difference between fixed and adjustable rate loans is one of the most important things for you to do as a home buyer.  

The main difference between these two types of loans is that a fixed rate loan keeps the same interest rate throughout the repayment period. This means that the monthly payment on your house will never change.

Adjustable rate loans have an interest rate that changes over time. In some cases, this may involve a hybrid type of loan where you begin with a fixed rate and transition to an adjustable one after at a certain time during the repayment period.

While fixed rate loans give you the benefit of consistency, adjustable rate loans have the potential to help you pay lower interest rates during certain points of the repayment period.  

Government Backed and Conventional Loans 

Conventional home loans loans are those that are not insured by the federal government. While these are harder to qualify for, they may be your best bet if you do not fit the requirements for a government backed loan.  

Government backed loans include the following main types, and each one has specific guidelines and benefits that we can help you to understand as you begin the loan application process. 

  • FHA loans
  • VA loans
  • USDA loans 

Since the government backs these three types of loans, lenders are more likely to approve them for people who are considered to be a higher risk than others.  

These may be an option for you if you are a first-time home buyer, have a short or negative credit history or if you need to put down a lower down payment than what is required for a conventional loan. 

Jumbo and Conforming Loans 

The first thing you need to know about conforming loans is that Fannie Mae and Freddie Mac are two major corporations that are involved with purchasing and selling loans to investors as securities.

Since these government-backed corporations plan to sell the loans on Wall Street, they set specific guidelines that minimize the risks involved.

For you, the most important guideline to be concerned with is the limits that they place on the size of the loan that you can secure.

In today’s housing market, it is possible that you may not find a house with a price that fits within the guidelines set for conforming loans. When this happens, you have the option of using a jumbo loan to secure the financial assistance you need to make your home buying dream a reality.

Non-conforming, or jumbo loans, are provided by lenders who do not plan to see them to investors. For this reason, they typically have more lenient standards regarding limits as well as credit standing requirements. 

The type of home loan that you choose affects your financial security and happiness for many years. Let us help you understand the pros and cons of each different type so that you can make the right choice for your future.

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How to Choose the Right Type of Mortgage Loan

Hey Friends / Hey Family!!

Type of Mortgage LoanBuying a home and obtaining a mortgage is perhaps one of the largest debts you will ever acquire in your life. For this reason, we want to help you professionally manage that debt, and in order to do that we must find out what is important to you about your upcoming home purchase.

In other words, we want to custom fit this mortgage to your individual needs like a well-tailored dress for the ladies or a custom-made suit for the fellas. You feel me? Good! So let us discuss this some more. In order to choose the right type of mortgage loan for you, it’s worth mentioning the 4-5 types of mortgages that you will most likely encounter when speaking to a mortgage lender. Let us have a look below.

1. VA Loan – This loan is available for Active Duty Service Members and Veterans that allows them to purchase a home with zero down and no private mortgage insurance (PMI).

2. FHA Loan – This type of mortgage loan allows a homebuyer to purchase a home with as little as 3.5% down, which can also be a gift. This loan also allows for prospective homebuyers with less than perfect credit to obtain a loan in as little as 2-3 years after a bankruptcy or foreclosure. The FHA loan does, however, have private mortgage insurance on the loan on an up-front and monthly  basis.

3. Conventional Loan – These loans require as little as 3-5% down and require private mortgage insurance. However, the PMI eventually drops off once you have accumulated 20% equity in your home. Keep in mind that this PMI will usually be required for a 5-year minimum before you have it removed from this type of mortgage loan.

4. Jumbo Loans – These loans are categorized as anything above the conforming loan limit of $453,100 (in most counties – some high cost counties allow you to go higher).

5. Down Payment Assistance Loans – These loans are available for homebuyers that are interested in obtaining a grant in the form of a forgivable second mortgage that ends up being forgiven in 3-5 years after you have owned the home. Remember this is a generalization as each program has different guidelines/requirements.

Now that we have reviewed each type of mortgage loan, ask yourself the question, “Which one of these mortgages would appeal the most to me?” From there, it is time to zero in on structuring your mortgage. What I mean by structuring the mortgage is ensuring that the down payment, cash to close, and monthly payment are all within your budget for this upcoming purchase. From there your mortgage provider will be able to tell you exactly how much you qualify for and off you go… Now it’s time to get your certified prequalification form and write Your New Home Story!

If you are in the market to purchase a home and would like more information on different types of mortgage loans, feel free to contact me today at 480-800-8387 or email me to schedule your preliminary mortgage consultation over the phone.

Semper Fi!
Jimmy V.

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