by Andy Hunt
With Nashville seeing record gains in home values over the last few years, we are having more conversations around equity and what to do with it. While there isn’t a “one-size-fits-all” approach, a few key thoughts come to mind around the subject of increased value and equity.
1. Home Insurance: Right off the bat, your home is potentially worth more now than when you first purchased it, and, unless you’ve updated your homeowners insurance recently, to reflect its current value, you may be greatly under insured should something happen to your home.
2. PMI: PMI is Private Mortgage Insurance, and it’s typically an additional monthly fee when you pay your mortgage. PMI is required when the borrower puts down less than 20% of the purchase price as the down payment, therefore having less than 20% equity in the total value of the home. However, there are a few ways PMI can go away. One example is when the property appreciates in value, and the debt on the home is 80% or less of the value of the home. So, if you currently have PMI, you may be able to ditch it with refinancing based on the current market value. Depending on your loan product, should the new loan to value ratio be 80/20 or better, your PMI could go away.
3. HELOC: A Home Equity Line of Credit kind of acts like a credit card drawing against the equity in your home. It’s the amount between what you owe on your first mortgage and the 10-20% equity your lender will want to keep in house, and you can use this money for whatever you’d like. A great idea for the HELOC could be for an income producing expense, such as an investment property or home renovation. For example, you could use your HELOC for a down-payment on an income producing property, and put the cash flow right back into the HELOC to pay it off. Rinse and Repeat.
4. Cash Out Refinance: It’s what it sounds like. Your home has appreciated in value, you refinance (obtain a new loan on your home), and you receive the difference in cash of what you owe vs. the new loan amount. For example, if your home is valued at $500,000 and you owe $300,000, you have $200,000 in equity.
Why use your home’s equity? With the rates as low as they are, using your home’s equity can be a great way to borrow large amounts of capital with the least amount of interest, netting you even more return. We are happy to sit down with you and discuss your options and goals.