Equity built up in a manufactured home offers the same advantages as the equity in any other type of home. Why is home equity so important? In a nutshell, equity is a great financial tool that you could use in order to secure a home equity loan, a home equity line of credit, also referred to as HELOC, or a cash-out refinance.
When buying a manufactured home, the upfront payment you make to purchase the home immediately provides you with equity, which is equal to the amount put down. For instance, if you make a $20,000 down payment when you buy your manufactured home, you will have $20,000 in equity right after closing on the home.
Additionally, the amount of equity increases as you pay down your manufactured home loan. That’s because part of your monthly payment goes toward the outstanding principal balance of your loan. To find out how much equity you currently have in your manufactured home, you need to subtract your manufactured home loan balance from the appraisal value of the home.
An important aspect you should be aware of is that there are a few ways you can build equity faster. One of them is putting extra cash, such as your tax refund, toward your manufactured home loan balance.
Using Your Tax Refund to Boost Equity
It’s February already, and many homeowners look forward to tax season, expecting a tax refund. Last year, nearly 8 out of 10 taxpayers received a tax refund, worth an average of $2,535, according to the IRS. Regardless of the amount owed to you by your state or the federal government, putting your tax refund toward your manufactured home loan year after year will allow you to build equity faster and save money by paying off your manufactured home loan early.
For instance, if you borrow $80,000 to buy a manufactured home at 7% interest, with a 15-year loan term, you’ll end up paying nearly $50,000 in interest. If you make an extra annual payment of $2,500, you could save about $17,000 in interest over the life of the loan and pay off your manufactured home loan approximately 4.5 years earlier. Thus, using your tax refund to pay off your manufactured home loan early basically frees up your future money, which you would have otherwise paid in interest, for other uses.
Once you’ve paid off a significant amount of your manufactured home loan, you can leverage that equity to secure a home equity loan, HELOC, or cash-out refinance. Although cashing out equity essentially means adding another lien on your manufactured home, equity loans typically carry lower interest rates than unsecured personal loans.
How You Can Use Your Home Equity
Home equity loans, HELOCs, and cash-out refinance loans convert your equity into cash, which can then be used for different purposes, such as emergencies, renovations, debt consolidation, or down payments on second homes. Now, let’s find out more which type of loan makes more sense for you.
Home Equity Loan – A home equity loan allows you to borrow a fixed, lump-sum amount against the equity you’ve built up in your manufactured home. Lenders determine the loan amount based on how much progress you’ve made in paying down your existing manufactured home loan. The amount that you can borrow also depends on your income, credit score, and the market value of your manufactured home. You’ll repay the loan amount with monthly payments, over a fixed term. You can opt for a home equity loan if you intend to sell your current manufactured home and move up to a larger, more expensive manufactured home, buy a second home, renovate your home, consolidate debt, or enhance your retirement plan.
Home Equity Line of Credit (HELOC) – This financing option provides continuous access to funds available for you to borrow, up to a certain limit. Functioning much like a credit card—which means that you make payments only on the amount that you actually borrow—a HELOC allows you to borrow repeatedly if you need to. An essential aspect is that a HELOC’s funds are available only for a specific time frame. This type of loan is best suited for long-term, ongoing expenses, such as home improvements, medical bills, or college tuition.
Cash-Out Refinance – A cash-out refinance loan replaces your current manufactured home loan with a new, higher-balance loan. In general, the difference is paid in cash. Similar to home equity loans and HELOCs, the amount you can borrow when opting for a cash-out refinance depends on how much equity you have in your home. Cash-out refinance loans can be used for different purposes, such as renovating your home, consolidating debt, and obtaining a lower interest rate, a shorter loan term, or both.
Because you’re using your home as collateral when you take out a home equity loan, HELOC, or cash-out refinance, failure to repay any of these loans could put you at risk of foreclosure. Therefore, if you’re considering any of these financing options, don’t hesitate to get in touch with our friendly professionals, who can help you make the best financial decision for your particular situation.