Financial Literacy 2007 - Home equity
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home equity
Other ways to tap home's equity

Click on the loan types to discover the qualities of each loan.

Other home equity loans
  1. Hybrids.
  2. Piggybacking.
  3. Reverse mortgage.
  4. Cash-out refinancing.

Hybrids

What it is: These are usually a variant on home equity lines of credit or home equity loans.

Factors to consider: There is a lack of uniformity in this part of the lending market and the loan characteristics vary widely. Make sure you understand all the contract details when taking this type of loan. This work sheet can get you started.

Tip: Use this work sheet, "Questions to ask lenders," when interviewing lenders.

Piggybacking

What it is: This type of loan involves taking a primary and secondary mortgage concurrently, usually to avoid Private Mortgage Insurance (PMI) or in place of a down payment. It consists of a primary mortgage for 80 percent of the home's value, plus a second mortgage for the rest of the money needed.

Factors to consider: This type of borrowing is especially sensitive to slides in the housing market because it entails borrowing a large portion of home equity. Unfortunately, this type of loan tends to have a higher-than-average rate of default, perhaps because it's easy for borrowers with little credit history to overextend themselves.

Tip: Crunch your numbers using our mortgage calculator.

Reverse mortgage

What it is: This is a special type of mortgage that enables older homeowners to convert the equity in their homes into cash, using a variety of payment options to address their specific financial needs. Unlike traditional home equity loans or mortgages, a borrower does not qualify on the basis of income but on the value of the home. In addition, the loan does not have to be repaid until the borrower no longer occupies the property.

Factors to consider: Reverse mortgages are only available to seniors and subject to restrictions. Of reverse mortgage loans, only the Home Equity Conversion Mortgage (HECM) is insured by the federal government. These mortgages can carry a large price tag. Closing costs can be rather steep, making these loans expensive for people who borrow from them for only a couple of years.

Tip: Crunch your numbers using our mortgage calculator.

Cash-out refinancing

What it is: This is a new mortgage for a larger amount than is owed on the current mortgage with the borrower receiving the difference in cash. Audio story: What's a cash-out refinance?

Factors to consider: This type of mortgage usually has closing costs that can usually be gotten around with a home equity loan. Know the terms of your first mortgage and if it makes sense for you to refinance, says Nancy Flint-Budde, a certified financial planner. If you're 20 years into a 30-year mortgage, you're paying more principal than interest. In that case, it might not make sense to refinance, even if your current rate is slightly higher. Her litmus test is threefold: This type of loan is really only smart if: you get a lower rate, a shorter repayment term and can roll in closing costs so there's no cash out of pocket.

Tip: Mash the numbers with our spiffy refi calculator.

Has home equity funded your dreams or turned into a nightmare? Share your story.

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