You bought a Westfield home two or three years ago. Its value increased quite a bit since then. The difference between what you owe and your property’s value is called “equity”. You can use this equity in a myriad of ways: a vacation, a wedding, a new car. But to make the best use of your home equity, you should either use it to buy a new home or borrow against it to pay off debt or remodel/update to further increase the value of your property.

Smart Ways to Use Your Home Equity

New Home Purchase

Starting a new family? Need a larger home? Downsizing after the kids flew the nest? Ready to retire and want to simplify your lifestyle? Are you simply ready for a change? Then it is time to buy a new Westfield home. When you sell your current home, roll over your home equity into the purchase of a new property. The higher the down payment, the less you pay on your new mortgage. Or, if you receive enough equity, pay for a new property in cash.

Borrow Against It

There are three ways to borrow against the equity in your home: a home equity loan, a HELOC (home equity line of credit) or a cash-out refinance. A home equity loan is like a second mortgage. You borrow a specific amount that gets paid out in even amounts over a specified time period.

A HELOC acts more like a credit card, with your Westfield home used as collateral. Your lender approves you for a certain amount. You use however much of it that you need. That can be several smaller amounts or one large sum. As long as it totals less than your “limit”, you may borrow against it. For the draw period (five to 10 years), you may pay only interest if you want. After that, your payment jumps up to include principal as well as interest.

With a cash-out refinance, you may borrow up to 90% of your home’s value (depending on your credit score). Lenders never allow a 100% cash-out refinance. This pays off your original home loan and gives you the difference in cash to use as you wish. So, if you owe $200,000 on your Westfield home but it’s worth $500,000, you can refinance as much as $450,000 with excellent credit. That gives you $250,000 in cash (minus expenses) at the end of the refinance. A lower score means a lower percentage allowed. Keep in mind, though, that the new loan will be a higher amount than your original loan. That means a higher monthly payment.

Talk to your financial advisor to determine which option works best with your particular situation.

Scott Gleason, CRS at Coldwell Banker Realty – East, NJ Luxury Homes