Looking to add a wing to your house, buy a weekend getaway, or pay for Junior's education? Borrowing against your home is still one of the cheapest ways to raise the cash.
You've probably already refinanced, but it may make sense to do it again. If you have a $500,000 mortgage at 7%, for example, you can lower the monthly payment by $503 -- or 15% -- by refinancing at today's average 30-year fixed mortgage rate of 5.45%. If you can take a chance on a loan that floats after five years, you can go as low as 4.45%. The savings from refinancing has to outweigh the closing costs on your new loan. So if you face $10,000 in costs and can save $503 a month, it'll take you 20 months to break even.
Another way to raise cash is to take a larger mortgage than the one you're paying off. With a $500,000 mortgage on a $750,000 property, you can raise $100,000 by increasing the loan to $600,000. There are limits, though. The mortgage-interest tax deduction is only available on up to $1 million of principal used to buy or improve a home. (This, like most itemized deductions, phases out for married taxpayers with adjusted gross income above $142,700.)
HOME EQUITY LOANS
Interest rates average 6.1% for a $75,000 loan. The real cost will be lower, though, since you can deduct interest on up to $100,000 of principal. (You could lose the deduction if you are subject to the alternative minimum tax and use the cash for something other than your home.)
Rates are even lower on a Home Equity Line of Credit, which allows you to borrow up to a set amount and draw the cash as needed. On a $75,000 line, for example, you'll pay 2.86%. But the interest rate floats with short-term rates, so payments can go up if, as expected, the Federal Reserve continues to raise rates.
If you're 62 or older, you're eligible for a reverse mortgage, which allows you to take cash from your home by gradually liquidating some of your equity.
There are several types of reverse mortgages, but the most popular sort -- the home equity conversion mortgage -- pays you based on factors including interest rates, your age, and your home's value and location. Consider a 71-year-old New Jersey resident with a house worth $300,000. According to the calculator at aarp.org/revmort, he could get a credit line for up to $167,367 or a monthly payment of $1,071, or some combination thereof, for as long as he lives in his home. With a credit line, the unused balance grows over time.
The drawback: Fees can run to 6% of either your home's value or of the federal mortgage insurance limit for your county, which ranges from $160,176 to $290,319. You'll pay whichever is lower. But you won't have to repay the loan or its accrued interest until you move, sell, or die (in which case your estate will repay it). And your debt will never exceed your home's value. The interest rate on a reverse mortgage adjusts either monthly or annually, based on the one-year U.S. Treasury rate. Right now, rates start around 3.5%, with an extra 0.5% added to cover some loan features.
By Anne Tergesen