How do you release some of the capital tied up in your home?
Although there are problems in the real estate market right now with resale prices falling, let’s focus on the general principles making the mortgage market work. When the housing market recovers, the equity becomes positive and can be used in a number of ways. At present, you’re likely to have negative housing equity where you owe more than the property is worth. Some people think of positive equity as a windfall gain or additional capital. Locked up in the bricks, it’s of little use, but there are two different kinds of mortgage to release some of this value. The amount of the existing mortgage is subtracted and you can borrow the remaining amount up to the limit. It’s better to use the credit for big ticket items rather than for day-to-day expenses, but there are no limits on how you spend the money. The second option is a home equity loan or refinancing mortgage that pays off the existing mortgage and creates a replacement including a cash-out lump sum. Thus, unlike the HELOC where you only pay interest as you use the credit facility, you pay interest on the whole sum from the time you draw it down. Other people consider positive equity to be savings. Thus, rather than the first view which can lead to you frittering away the value of your home, this gives you a solid basis for planning for your family’s future or your own retirement.