Home Equity in Hawaii: How and When to Use It

With home values in Hawaii on the rise, your home's equity could be worth more than you thought. Equity in your home is the amount of the property that you own — minus any loans such as a mortgage. You can tap into your home’s equity in several ways, giving you access to cash. The most common options are a cash-out mortgage refinance or Home Equity Line of Credit (HELOC).

Keep reading to learn more about each type of loan and when you should consider them to access the equity in your home.

What is Refinancing?

A mortgage refinance doesn’t rework your existing mortgage. Instead, the process of refinancing involves taking out a new mortgage and using the funds to pay off your existing mortgage. Many homeowners refinance their homes to take advantage of more desirable home loan terms. This could include lower interest rates, a shorter loan term, or a lower monthly payment. For example, if you qualified for a 10% interest rate on your original mortgage and interest rates are lower than when you bought your home, you can refinance to get a new mortgage with a 5% interest rate.

What is a Cash-Out Refinance?

Cash-out refinancing works the same way as a normal refinance — with one exception. Rather than taking out a loan in the remaining balance of your original mortgage, a cash-out refinance takes out a loan for an amount higher than your current balance. The new mortgage is first used to pay off your existing mortgage. The remaining funds go to you as a lump sum of cash.

There are restrictions to cash-out refinances, notably the maximum amount of loan you can get. You’ll need to have equity in your home to be eligible for a cash-out refinance, and most lenders limit how much equity you can access.

For example, if your home is worth $500,000 and your current mortgage balance is $300,000, you will have $200,000 worth of equity in your home. You might qualify for a cash-out refinance that lets you access up to 80% of your home equity, or $160,000. If approved, you could take out a new mortgage for up to $460,000. The new mortgage funds would first pay off your remaining $300,000 mortgage balance and you would receive $160,000 in a lump sum.

What Can Cash-Out Refinancing be Used For?

Funds from a cash-out refinance can be used for almost anything. Want to remodel your kitchen or bathrooms? Looking to consolidate existing debt? Considering how to pay for your children’s college costs? The lump sum of money from a cash-out refinance can help cover all of these costs.

Of course, just because you can access funds doesn’t always mean you should use them. Home improvements could add some value to your property, but the increased value often doesn’t cover the cost of remodeling. Likewise, consolidating existing debt or using cash-out refinance funds to pay for college could give you a lower monthly payment for these debts. However, stretching the loan out for another 15 or 30 years in a mortgage means you’ll likely pay more in interest.

When Should Hawaii Homeowners Refinance?

The idea of a cash-out refinance is appealing to many homeowners in Hawaii, but is it right for you? Before you decide, be sure to consider these factors:

• A cash-out refinance is a long-term loan that you may have to pay interest on for decades.

• Many homeowners use cash-out refinancing for home improvement projects, which could give you access to tax deductions.

• Like any mortgage, you’ll have to pay closing costs on your refinance.

• You may get access to a lower interest rate by refinancing your home.

What is a Home Equity Line of Credit (HELOC)?

Another option to access the equity in your home is a Home Equity Line of Credit also known as a HELOC. Where a cash-out refinance gives you a lump sum of money, a HELOC is a revolving line of credit that can be accessed over again (provided you pay off your balance).

This type of HELOC functions like a credit card that utilizes the equity in your home. Your credit limit is based on the equity you have and the amount you qualify for. You can withdraw funds from the credit line any time during the draw period. The money you withdraw is added to your balance. You pay off your balance and get access to your full credit limit again.

Unlike refinance mortgages — which usually have fixed interest rates — HELOCs have variable interest rates. That means your interest rate could go up or down depending on the current state of rates.

What Can HELOC Funds be Used for?

Just like cash-out refinance funds, money from your HELOC can be used for anything. However, it’s usually not recommended to use HELOC funds if you only need to borrow a small amount of money or to cover daily expenses.

When Should You Use a HELOC to Access Home Equity in Hawaii?

A HELOC is a great option to help cover recurring large expenses. That’s because you can borrow the money to pay for expenses and then pay the balance down over time. Many homeowners in Hawaii use HELOCs for home improvement projects or even college tuition payments.

For example, if you’re renovating your kitchen, you can borrow from your HELOC whenever you need to pay a contractor’s bill and pay it off over time.

Should You Refinance Your Home or Take Out a HELOC?

At ASB, we understand choosing to refinance your home or take out a HELOC to access equity is a big decision. The choice you make will likely have an impact on your finances for years. Luckily, our team of experienced home loan officers can help you navigate the refinance or HELOC process. We can help you determine what option is right for you and walk you through the loan application process. Find an expert home loan officer to learn more about refinancing or taking out a HELOC on your Hawaii home today.

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Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion that it is appropriate for readers. The information that is contained in this material is general nature. Readers should seek professional advice for their respective situations.

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