How to cash out a U.S. home mortgage loan?

A few years ago, homebuyers would find that the value of their house had appreciated, but they were a little tight on cash and didn't want to sell the house to cash out. So how should they use the appreciated value? Americans who don't like to save money and are short of money have thought a lot about this and developed various ways to cash out their houses. What are these methods?

First, understand the concept of home equity: the value of the house - the remaining amount of the loan = home equity

For example, the house was bought for 500,000, and the loan was 400,000. Now the house has appreciated to 600,000, and there is 350,000 left on the loan. Then 600,000 (the value of the house) - 350,000 (the remaining amount of the loan) = 250,000 is the home equity.

There are currently two mainstream methods, one is a home equity line of credit (HELOC), and the other is a home mortgage loan (Cash out refinance)

Home equity line of credit (HELOC)

Home equity loan is equivalent to applying for a credit card with a house as collateral. You only need to pay interest when using the loan amount. If you don't use the money, you can repay it at any time without paying interest, just as convenient as a credit card. HELOC is suitable for small loans. The interest rate is relatively low in the first few years of the preferential period. After the preferential period, the interest rate is very high. The low cost is suitable for short-term use.

In the above example, the borrower wants to borrow 50,000. Two loans will be generated on the house. The first is the unpaid principal balance of 350,000, and the second is a HELOC of 50,000. Both loans must be repaid every month.

Home mortgage loan (Cash out refinance)

Home mortgage loan means that you will receive 50,000 directly at the end of the loan period. You have to pay interest from the beginning of the loan. Because the current interest rate is very low, in the long run, it is more appropriate to make a home mortgage loan for long-term use.

In the same example, the borrower wants to borrow 50,000. The previous 350,000 and the new 50,000 are combined into a loan of 400,000. Only one loan needs to be repaid every month.

Example analysis:

Usually, banks allow loans of up to 70%-80% of the value of the house. The value of the house (assessed value) is based on the house assessment report (assessment report) made by a third-party appraiser designated by the bank.

For example, when the house was bought, it was 500,000 yuan, and the loan was 400,000 yuan. Now the house has appreciated to 600,000 yuan, and the loan is 350,000 yuan, then 600,000 yuan - 350,000 yuan = 250,000 yuan is the net value of the house.

Taking 75% as an example, the value of 600,000 yuan is the loan 60x75% = 450,000 yuan, and 450,000 yuan - 350,000 yuan = 100,000 yuan is the expected amount, not 250,000 yuan.

If the value of the house drops to only 450,000 yuan, then 450,000 yuan - 350,000 yuan = 100,000 yuan is the net value of the house.

450,000 yuan x 75% = 337,500 yuan, which is less than the remaining 350,000 yuan of the loan. Even if there is 100,000 yuan of house equity, it is impossible to cash out the loan. In this case, the loan balance is greater than the value of the house, which means that even if the bank sells the house, it cannot recover the loan amount. This is called a debt mortgage.

What can the cashed-out money do?

Investment. If you encounter a good investment project and are short of money, you can consider cashing out. With such a low mortgage interest rate, it is easy to outperform the mortgage interest rate by doing some investment projects.

Upgrade and change houses as the down payment for the next house, increase the down payment for the next house, and reduce the pressure of monthly payments.

Pay off credit card debts and other debts. If credit card debts and other debts are very high, you can consider cashing out the house and consolidating the debts. After all, the interest rate of credit cards is very high, with an annual interest rate of more than 17%, while the current annual interest rate of mortgage loans is only more than 3%, which can save a lot of high interest.

Renovation. Whether you live in it yourself or plan to sell it, you can use this money as the appreciation and renovation of the house, so that the value of the house will also increase~