Cashing Out Your Equity – How Much Is Enough?

Summary

Many property owners have the ability to cash out their equity. Rising home values have allowed people to tap into their equity to generate thousands or tens of thousands of dollars.

Lenders often allow a borrower to cash out up to 100% or even 125% of the value of a property.

Here is some help in deciding how much of a cash out is right for you.

Basics

You can cash out your equity into a new mortgage loan. There are many loan options, including:

• 30 year fixed
• Interest only loans
• Minimum payment cashout

30 Year Fixed Mortgage

This type of loan has the advantage of interest rate stability. It is usually the most expensive because the interest rate is the highest and the monthly mortgage payments are the largest.

This type of loan may be of limited value to someone who intends to sell the property shortly. You don’t need a 30 year fixed loan if you are only going to keep the property for one more year.

Interest Only Mortgage

An interest only mortgage allows a borrower to make a lower payment than is normally allowed. An interest only payment keeps the principal balance the same – the loan size does not go up or down. This may be appropriate for borrowers who do want a lower payment on their monthly mortgage but do not want negative amortization on their property.

Minimum Payment Loan

This type of loan is a mortgage where a borrower has the option to pay less than an interest only payment. This results in a very low mortgage payment. This type can help someone who wants to have the lowest possible payment.

The advantage of this loan type is that it helps a borrower’s monthly cash flow. The disadvantage of this loan is that if you make a minimum payment the amount lower than an interest only payment is added onto your principal. For some borrowers this is acceptable, especially if they believe the value of the property will continue to increase.

How Much Is Enough?

A borrower should use their equity carefully. It can be helpful to pay off higher interest rate consumer debt such as credit cards or car loans. Using the equity for other extravagances such as boats or traveling may not make as much sense.

Consumer debt that is consolidated into a mortgage loan may convert the debt’s interest payment into a tax deductible item. Check with your tax advisor about this.