Finding the money hidden in your home
We’ve always heard that owning a home is a great investment. The problem is, barring a plumbing catastrophe, that investment is not liquid. Your home’s value is locked up and hidden deep inside those four walls. Before 1997, due to stringent homestead protections, Texans weren’t able to tap the equity in their home, but since then the laws have changed and you can gain some liquidity from your most precious investment, with some limitations.
Texas protects homeowners
In an effort to protect homeowners, the Texas Constitution lays out some stringent rules for lenders in regards to home equity loans and lines of credit.
First off, fees that lenders can charge are capped at 3%, excluding interest, and as of last year that limit includes any applied discount points. These “points” are simply pre-paid deductions in 1% increments, used to lower your loan’s overall interest rate. For home equity loans, it’s likely you won’t be offered a discount points option very often since they are now included in the 3% fee cap. The result could be a bit higher interest rate.
Plus, home equity packages in Texas are limited to 80% of a home’s equity, less any loans already secured by the home. For example, if the market value of your home is $200,000 and your current mortgage balance is $100,000, you may qualify to borrow $60,000 of the home’s $100,000 equity (80% of $200,000 = $160,000).
Home equity loan
Accessing your equity through a loan is pretty straightforward. Once the application process is completed and you are approved, you will receive a lump sum. The interest rates on repayments can be fixed or variable, but for home equity loans they are usually fixed. Interest is charged on the full amount of the loan and begins accruing on the date of closing. You can use the money in any way you see fit.
The interest you pay may be tax deductible, too. Ask your tax advisor for details.
Home equity line of credit
Offering even more flexibility, and available in Texas only since 2003, a home equity line of credit (HELOC) allows you to access the same amount of equity available in your home as a loan, but to draw from the approved credit limit as you need it, rather than taking a lump sum.
Say you have a $50,000 line of credit but only want to withdraw $5,000 right now. You simply write a check tied to the line-of-credit account. Now, rather than being charged interest on the whole amount, you make payments and accrue interest only on the $5,000. Need to take another advance? You don’t have to be reauthorized or approved again—just access what you need, up to the credit limit. Texas also requires a minimum draw of $4,000 on a HELOC.
Again, the interest rate charged may be fixed or variable, but in this case it’s frequently a variable rate. And the interest is generally tax deductible, as well.
A serious consideration
Though the temptation can be unquestionable, it’s best not to use home equity proceeds for frivolous purchases, such as expensive vacations. More appropriate expenditures might include home improvements or other major expenses.
Consolidating existing debt with your home equity loan may allow you to lower your interest rate and reduce your monthly payments. However, this is a decision you should take seriously. You are placing your home up as collateral when you utilize a home equity loan. Home equity loans and lines of credit—used prudently—can be a convenient way to access your home’s hidden value.
|Hal Bundrick is a writer, Certified Financial Planner and former financial consultant and senior investment specialist for Wall Street firms. He writes about personal finance and investing for NerdWallet. This article was provided compliments of NerdWallet.com, a consumer finance news and comparison website committed to helping you save money.
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