Millions of Americans have little to no cash flow thanks to COVID-19. While it can be scary, if you own a home, you have options.
Before you jump in and refinance your mortgage, though, know your options and the requirements. Some lenders tightened restrictions in the face of COVID-19, while others offer the olive branch you need to temporarily ease your financial struggles.
If you’re a homeowner, check out your options below.
Ask for Help
First, exhaust any options your mortgage lender offers. For example, many lenders offer forbearance agreements. While you’ll still owe the payments at the end of the forbearance period, you get time to come up with the funds. If you know your issue is temporary, such as a temporary furlough, you can request forbearance, save the cash and pay it when you’re back to work.
While the forbearance doesn’t necessarily put cash in your pocket since you have to make the payments at some point, it alleviates the stress for now. Knowing that you have the funds should an emergency arise may be a relief for some. Use caution with this option, though.
Some lenders offer modification options or payment arrangements to help alleviate the stress for the time being. Ask your lender what they offer – the worst they can say is ‘nothing.’
Use your Home’s Equity
If your home has equity, you can use it during these difficult times. You can tell if you have equity by determining your home’s estimated current value and comparing it to your outstanding principal balance.
For example, if your home is worth $300,000 right now and you owe $150,000, you have $150,000 in home equity. You can’t grab it all; unfortunately, lenders need leverage, aka existing equity in the home. If you default on your loan, lenders need to know they’ll make their money back by selling the home.
Today, most lenders allow borrowers to tap into 80% of the home’s value. On the example above, it means taking out as much as $90,000 in equity.
There are several ways to use your home’s equity.
Evaluate your first mortgage. Do you have the lowest interest rate possible? Do you have a great term you don’t want to lose? If either of these are true, leave your first mortgage alone and move onto the next options.
If, however, you have a higher interest rate or you aren’t tied to the term, a cash-out refinance in today’s low interest rate environment may be a great option. You’ll refinance your existing loan, but borrow a higher amount. In our example above, you have $150,000 outstanding, but can borrow up to $240,000. Your credit score and debt ratio (ability to repay the loan) will determine how much you can borrow.
Home Equity Line of Credit
Would you prefer to leave your first mortgage alone? A home equity line of credit is a second mortgage. You leave your first mortgage untouched and borrow the amount you need/can borrow in a second mortgage.
The line of credit works like a credit card. You’re given a credit line. You don’t have to take all of the cash at once. You don’t even have to take any money out right away. It can sit there as an ‘emergency fund.’ If you don’t use any funds, you don’t make payments. Once you use the funds, though, you pay interest on the amount used. This happens for the first 10 years. You use and repay funds (reusing what you repay if applicable) just like a credit card.
After the 10 years, you enter the repayment period. It’s then that you are REQUIRED to pay back the amount used plus interest. This goes on for another 20 years until you pay it in full.
Home Equity Loan
If you’d rather have a lump sum of cash right now, the home equity loan may be a good option. Like the home equity line of credit, it’s a second loan but the similarities end there.
A home equity loan is a loan that requires principal and interest payments right from the start. It also doesn’t allow you to draw funds from the balance like the HELOC offers. You get the funds at the closing and that’s it – it’s a closed-end loan.
The home equity loan offers the benefit of a fixed interest rate. HELOC rates may change from month to month, making it hard to predict your minimum payment. You know the home equity loan payment right from the start.
Lease your Home Back
Finally, if you’re in serious financial trouble, consider selling your home to an investor that’s willing to lease it back to you.
Many investors offer this option with different choices:
- Sell the home outright, keep the equity and rent the home back from the investor
- Sell the home outright, keep the equity, and sign a rent-to-own agreement to buy the home back eventually
Selling your home to an investor often happens in as little as a few days, giving you access to fast cash during these difficult times.
If your home has equity, it may be time to make it work for you. While it’s a nice feeling knowing you sit on a nice nest egg, sometimes it’s necessary to grab that cash and use it to get yourself through difficult times. Weigh your options and make sure you know what you’re getting into as your home is your largest investment.Click to See the Latest Mortgage Rates»