Rising home prices, a restricted supply of new housing, and an incredibly sophisticated financial system have resulted in plenty of options for homeowners in the US. Whether it is to fund home improvement projects, invest in a second home, or merely unlock value on existing properties, there are a lot of innovative products, if used right, can substantially enhance individual and family finances.
While these offshoots of conventional loans and mortgages have been around for decades, many of them have only recently come to prominence, and still, a vast majority of homeowners remain unaware of their options. In this article, we dive deep into the workings and offerings of America’s $18 trillion mortgage industry, and how consumers can make the most of it under the prevailing market conditions.
- Home Equity Loans
Often referred to as a second mortgage, a home equity loan is a type of consumer debt, offered against the equity portion of the borrower’s property. Homeowners can borrow to the tune of 80% to 90% of a home’s appraised value, on a fixed-rate basis, with rates and terms depending on the borrower’s credit score, payment history, and monthly income.
This is similar to conventional mortgages, in that it offers a fixed repayment schedule, comprising both the principal and interest components. On non-payment or default, the property will be foreclosed to recover any pending dues, similar to most other mortgages. The interest rate tends to be on the lower side, since such loans are relatively risk-free for lenders, making them ideal for debt consolidation.
- Home-Equity Line of Credit (HELOC)
Similar to home equity loans, a HELOC is essentially a line of credit offered against the borrower’s equity on the property. This offers much more flexibility against traditional home equity loans, given that the funds aren’t dispersed lump-sum, but can instead be withdrawn as and when necessary. Borrowers need only pay interest on the amount withdrawn, and not the entire value of the line of credit.
Initially, borrowers need only pay the interest on what has been withdrawn, but once it enters the repayment period, higher payments will be necessary to include the principal amount. Such loans are often provided with a variable interest rate, which means that based on prevailing market conditions, interest rates on the outstanding amount can increase substantially.
- FHA 203(K) Loans For Home Renovation
When it comes to home improvement and renovation projects, the Federal Housing Administration offers plenty of assistance for lower-income households in the form of the FHA 203(K) loan. In a government-backed mortgage, the amount disbursed under this scheme is earmarked for the rehabilitation, construction, and repairs of the borrower’s primary residence.
While the above-mentioned options provide remarkable flexibility in terms of the purposes and intent of the loans, the FHA 203K is placed in an escrow account, and can only be released as and when the work is completed, directly to qualified contractors. There are further restrictions on the type of FHA home renovation, with certain luxuries and vanities not permitted, but on the whole, it adds plenty of value to lower-income households.
- Interest-Only Mortgages
As the name implies, these are mortgages where the borrower only pays the interest for the first couple of years, usually 5 to 10 years, following which both the principal and interest have to be repaid together.
This can prove to be expensive in the long run and slows down the rate of equity creation, but for an astute borrower, such mortgages can provide the means to maximize current cash flows, with opportunities to sell, or refinance at a later date, before the principal component kicks-in.
For homeowners, things have never been this good in terms of the number of options and opportunities available to them. For disciplined, and discerning borrowers, such unconventional types of mortgages stand to add substantial value to their finances in the long run.