You’ve accepted a new job, but you’ll have to move yourself and your family across the country. Or you’ve earned a promotion, but the new position comes with a catch: You’ll need to move hundreds of miles away. The good news is that many employers offer relocation plans that help cover the costs of company-mandated moves. Your job is to study your company’s relocation package to make sure that it will adequately pay the costs of a work-related move. Moving Costs You might think you know how much it will cost to move you and your family. After all, you’ve already gotten a bid from your movers. However, have you considered all the costs associated with moving? For instance, if you are driving your family across the country, don’t forget to factor in gas and meals along the way. Also, once you arrive at your new home, you’ll inevitably have to add furniture and decor changes to your residence. Does your company help pay for those costs? What if your new hometown has a significantly higher standard of living? You might want to negotiate a higher salary, if possible, before agreeing to relocate. Written plan? When you company offers to move you and your family to a new city, make sure to ask for its written relocation plan. Most large-size companies will have one. This plan should spell out exactly what costs your employer will cover. In addition to the costs of physically moving your belongings across the country, your company’s relocation program should cover the costs of temporary housing, which you might need as you search for a new home. It should also include the costs involved in returning to your previous home each weekend if your family is unable to move with you immediately. You should investigate, too, whether your company will provide any job-search assistance for your spouse if he or she has to surrender a job to make the move to a new home with you. This assistance could include covering the costs of hiring a job coach, providing referrals or providing interview opportunities inside the company. Other benefits A robust relocation package will include other benefits. Some, for instance, might provide you with paid time off as you settle into your new home after making a long move. Others might provide you with assistance once you arrive at your new home. Some companies, for instance, will handle the important, but tedious work of setting up your utilities and garbage pick-up services. Others might provide you with information on the local public school system or area recreational activities with your children. When you arrive at your new home, some companies might even provide an employee who spends extra time with you to answer any questions about your new office and community. This individual might also be responsible for helping you to assimilate into the community.

Relocation Assistance

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What would happen to your family if you suffered a serious injury and could not work for a year or longer? What if you unexpectedly died? Would your family be taken care of financially? The best way to ensure this is to have disability and life insurance. The good news? Many companies with more than 500 employees offer both disability and life insurance options as a benefit. Your job? You need to analyze these benefits to make sure they are worthwhile. Disability insurance Too many employees give little thought to disability insurance. They may have taken out large life insurance policies. However, what if you are disabled and you cannot work? How will your family cope financially if you are the primary breadwinner? This is where disability insurance is helpful. This insurance will pay a portion of your salary — often 60 percent of it — if you are disabled and can’t work. True, a portion of your income is not as good as receiving all of it. However, even receiving a percentage of your regular income might be enough to keep your family financially afloat until you can return to work. Don’t think you’ll suffer a disabling injury? A survey by Sun Life Financial found that people are three times more likely to suffer a disability or injury that keeps them out of work for a year before they hit age 65 then they are to die. What does this mean? It means that disability insurance is every bit as important as life insurance. Fortunately, many employers offer this benefit. Unfortunately, many workers pass on it. According to the Sun Life study, just three out of every ten employees has taken out disability insurance. How disability insurance works If you sign up for disability insurance from your employer, your company will take out a portion of your regular paycheck to cover the costs. If you become injured or disabled to the point that you can no longer do your job and can’t return to work for an extended time, your disability insurance will kick in. In general, there are two types of disability insurance offered by employers. Short-term disability insurance usually kicks in within 14 days of your disability. This insurance provides coverage that can last from six months to a year. Long-term disability insurance then takes over after this period. Your employer’s disability insurance will come with certain restrictions. First, the insurance will only cover a portion of your salary. That number varies, but most plans provide disabled workers with 60 percent of their salary. Some policies will provide a percentage only of your salary. With others, both your salary and any bonuses you earn are used to determine coverage. As a side note, very few plans will allow you to contribute to your 401(k) while disabled. Some disability plans will come with a monthly cap on how much coverage you can receive. If you earn a high monthly salary, you might feel some financial pain here. If you make $20,000 a month in income and bonuses, but your disability plan has a $10,000 monthly limit, you will have to adjust your spending patterns until you can return to work. Life insurance Many employers also offer their life insurance benefits. You’ll have to decide, though, whether your company’s life insurance is worth your investment. Company life insurance plans typically offer either a flat fee in case you die — say $70,000 — or a multiplier of your annual salary. Life insurance policies offered might pay out two times your annual salary. If you earn $60,000 a year, your life insurance will pay out $120,000. There are two main questions you’ll need to ask before investing in a company life-insurance plan: First, is it worth it? Secondly, is it portable? A company life insurance plan might not provide enough protection for the investment. It often makes more sense for employees to rely on life insurance purchased from outside companies. Most employees who do take out company-sponsored life insurance plans do so as a supplement to their main life insurance. Portability is an important issue, too. You want to make sure that if you leave or lose your job you can keep your life-insurance benefits. Some policies offered by companies do not allow their holders to take them along if they find a new job or lose their current one. Like all employee benefits, you need to analyze your company’s disability and life insurance options carefully. Researching employer benefits is far from enjoyable. However, only by doing this research can you make a decision whether these plans are a worthy investment of your dollars.

Life and Disability Insurance Plans

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Does your employer offer tuition reimbursement? If so, it is a benefit that could prove valuable. The cost of pursuing a primary or secondary college degree is constantly on the rise. However, this cost could be dramatically reduced for you if your company offers tuition reimbursement. Be careful, though, when signing up for this benefit. Not all offers of tuition reimbursement are equal. A popular benefit? It is unclear how many employers offer tuition reimbursement as part of their benefits package. Some resist this benefit because they fear that employees will use their free or reduced-cost education to earn an advanced degree that makes it easier for them to find new jobs. Other companies, though, consider tuition benefits as an investment in their employees. The hope is that the knowledge employees earn will make them better, more efficient workers. For you, the benefits of tuition reimbursement are evident: Advanced degrees can make it easier to receive promotions from your current employer or find new work outside your company. Either way, a new degree can help boost your earning power. Do your research Before taking advantage of any tuition reimbursement program, though, make sure to do your research. Many companies include stipulations in their programs. Some companies might require you to remain employed with them for a certain number of years after earning your degree. If you leave for a new job before these years pass, you’ll have to pay back all or part of your tuition. Though it varies, many companies require employees to remain with them for at least five years after earning their degrees. Other companies might require that you earn a certain grade-point average while earning your degree. An employer, for instance, might only reimburse you for 50 percent of your education costs if you can only muster a “C” average. If you earn an “A,” you might see 100 percent of your tuition costs reimbursed. Of course, you’ll be limited to the type of degree you can earn. If you work in an accounting firm, your employer probably won’t be willing to fund your pursuit of a master’s in creative writing. Is it a benefit for you? Not every employee should pursue an advanced degree, even if their employer offers tuition reimbursement as a benefit. For instance, if earning an advanced degree will not help you get promoted or find a more lucrative job, attending night classes and cramming for exams might not be worth the effort or the stress. Earning a second degree is no easy task when you are already working a full-time job. Also, if you are balancing a busy family life at the same time, you might find that you simply have no time to take the classes necessary to earn your advanced degree. Alternatively, maybe you’ve grown tired of your field and would like to branch out to a new line of work. Pursuing an advanced degree, even if your employer covers the cost, won’t make sense if you find your current career so unfulfilling that you are considering moving to a new field.

Tuition Reimbursement

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A growing number of employers offer direct deposit, in which your regular paycheck is electronically — and immediately — deposited into the bank account of your choice. It is certainly a convenient way of getting paid. But did you know that direct deposit might also save you money? The bottom line? If your company offers direct deposit, you should sign up for it. The Benefits What makes direct deposit so attractive? Your money will be immediately available to you on payday. You will not have to wait until the end of the workday to deposit a paper check yourself. This can be significant if, like many consumers, you pay some or all of your bills through automatic withdrawals from your checking account. If you rely on direct deposit, your money will always get to your checking account on time. This lowers the risk of accidental overdrafts. With direct deposit, your money will show up in your account even if you are sick on payday or on vacation when your human-resources department passes out your paycheck. With a paper check, you’d have to wait until you return to the office to deposit your money. With direct deposit, there is no delay; your money will be there for you. Savings The convenience factor is undeniable. However, direct deposit can also save you money throughout the year. That is because you will not have to drive to your bank with a paper paycheck every time you get paid. With the cost of a gallon of gas, these savings can add up. Additionally, banks and credit unions often provide their customers with financial incentives to sign up for direct deposit. This is because direct deposit requires them to expend less labor on getting your money into your bank account. How much can you save? According to a study done by Tinucci & Associates for NACHA, an electronic payment company, it can cost you an extra $5.88 to manually deposit your paycheck into your account versus through automated direct deposit. Now, if you get paid every two weeks, that $5.88 savings can turn into more than $70 worth of savings a year. This can add up over time. Splitting Accounts Direct deposit can also help you build up your savings. You can tell your employer to split your paycheck — in whatever manner you decide — between different accounts. You could, for example, automatically deposit 80 percent of your paycheck to your checking account and 20 percent to your savings account. Doing this allows you to build up your savings steadily without putting too much thought into it. That is key; it is easier to save money when it is automatically taken out of your check each pay period. If you have not yet signed up for direct deposit, now is the time to do so. Electronic deposits, after all, can save you both time and money, and that is a benefit worth taking.

Direct Deposit and Paycheck Allocations

View Resource Direct Deposit and Paycheck Allocations
Long gone are the days when most companies provided a pension plan for their employees. Today, employees are primarily responsible for saving their dollars for retirement. This is an important responsibility. Nothing can ruin a good retirement like not having enough money. Fortunately, employees can take advantage of the many types of retirement savings plans that employers offer today. These plans usually require that employees contribute a portion of their regular paychecks for their retirement. This percentage can vary, but many plans allow workers to contribute up to 15 percent of every paycheck to retirement savings. Companies then invest these dollars in a range of stocks, bonds and other investment vehicles. Most employees have the option of directing their dollars in specific directions, to help the dollars grow based on the employees need. Many employers will, at the end of the year, make a contribution, called a matching contribution, to the savings of their employees. This helps workers grow their retirement dollars at an even faster clip. Understanding how your employer’s retirement savings plan works is important. You need to do everything you can to make sure that you’ve saved enough money for your retirement years. An important step in this process? Studying your employer’s retirement savings plan and then using that information to maximize the money you can save each year. Defined benefits plans If your employer offers a defined benefits plan, better known as a pension, you are in luck. You will not have to make many investment decisions. When you retire, those pension plan dollars will be waiting for you. Under a defined benefits plan, your employer guarantees you a particular dollar amount during your retirement. Several factors impact the value, including your yearly compensation, the number of years that you’ve worked at the company and a fixed percentage rate calculated by your employer. That is the good news. The bad news? The odds are high that your employer does not offer this option. Pension plans have grown rare as more companies require their workers to take the lead in saving for their retirements. Annuities Your employer may also offer a retirement savings plan based on annuities. These programs come in several types. In general, annuities are defined benefit plans that provide fixed monthly payments that workers will start receiving once they retire. A traditional annuity plan is the joint and 50 percent type. Under this plan, the retiree receives his or her benefits for life. After death, the retiree’s spouse receives half the amount of the benefits until his or her death. There is also the joint and 66 percent. This plan works much the same way as does the joint and 50 percent plan. Retirees receive their benefits until they die, and then their spouses receive two-thirds of the benefit until their death. The joint and 100 percent plan, as you might have guessed, provides spouses with 100 percent of retirees’ benefits after these retirees die. The 10-year certain type of annuity is a bit more complicated. Under this plan, your benefits will be paid for life. However, if you die within the first ten years after retirement, your beneficiary collects the same dollar amount until that person reaches the 10th year of his or her retirement. At that time, all payments stop. If you die more than ten years after you retire, all payments stop after your death. A life-only annuity plan, as its name suggests, pays out benefits only until you die. A lump-sum plan provides you with a chunk of cash that you can then invest or spend as you see fit. Defined contribution plans Some employers today offer their employees one of many types of defined contribution plans. Under these plans, Your employer will make a regular contribution to your retirement savings based on your salary and participation in the plan. Usually, your employer will be able to make a contribution equal to a maximum of 15 percent of your salary or $40,000, whichever is less. Other companies offer a stock bonus plan. This plan operates similarly to the defined-contribution plan. However, instead of making monetary contributions to the plan, your employer will make a contribution in the form of company stock. Under a money purchase pension plan, your employer will make a contribution each year that is fixed and mandatory. This contribution can be no more than 25 percent of your salary or $40,000, whichever is less. Some companies will combine the profit-sharing and money purchase plans. Usually, companies that do this see earnings that vary widely from year to year. By going with a combined plan, they can make maximum contributions during years of strong revenue and lesser contributions during years in which revenue is down. Your company might also offer an employee stock ownership plan, also known as an ESOP. Under this plan, your employer contributes to your shares of their stock. You can participate in such a plan if you work at least 1,000 hours a year for your employer. 401(k) and related plans One of the more popular retirement savings plans today is the 401(k) plan. Under this type of plan, you’ll contribute a percentage of each of your paychecks to your employer’s retirement savings plan. This rate is usually left up to you, but in most cases you can contribute up to 15 percent of every paycheck to your retirement savings. The primary benefit of such plans is that the money you invest in them is tax-deferred. This means that you will not pay taxes on them until you withdraw these dollars. Another positive of a 401(k) plan? Your employer can elect to match all or a percentage of your contribution, something that can provide an extra boost to your retirement savings. If you work for a non-profit company, you might have a chance to participate in a 403(b) plan. This plan works just like a 401(k) plan though it is designed specifically to meet the needs of non-profit companies. All defined benefit plans and defined contribution plans offered by private companies are covered by the Employee Retirement Income Security Act (ERISA). ERISA is a federal law that sets minimum standards for most voluntarily established pension, retirement and health plans. Under ERISA, your employer is required to provide you with information about your plan. The act also gives you the right to sue your employer if you believe that it has breached its fiduciary duty in running its retirement savings plan. Preparing for retirement No matter what retirement plan your employer offers, the key for you is to participate in it and monitor its performance. Remember, the earlier you start saving for your retirement years, the better off you’ll be when you leave the workforce. Also, the more money you can stash away now, the more comfortably you’ll be able to live after retirement. That is why it is important to invest as much money as you can from each paycheck in your retirement savings plans. Secondly, don’t forget to keep an eye on the performance of your investments, especially as you get closer to retirement age. You are not guaranteed any return on your investments when you retire. It is important, then, to move your investments around if you are not happy with the returns that they are generating. If you have any questions or concerns about your company’s retirement savings plan, schedule an appointment with your human-resources department. The odds are that it is your responsibility to maintain your retirement savings plan. Don’t put it off.

Types of Retirement Plans

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Buying a home is an important decision. In fact, it will probably rank as the biggest purchase you ever make. Because of this, you want to make sure that you buy the home that’s right for you and your family. There is no one formula for determining which home is right for you. However, if you spend the time to analyze your family’s situation, your finances and the type of neighborhood that you prefer, you’ll increase your odds of finding the home that fits best. Neighborhoods and schools Before beginning your search for a home, decide what kind of neighborhood you prefer. You might find the perfect home for you and your family. If it sits in a neighborhood however that doesn’t match your needs, then you will not be happy no matter how large the master bedroom is, or how modern the kitchen looks. Do you have young children? Then you probably want to live in a neighborhood blessed with parks, libraries and a good school system. Have your children left home? Maybe your children are older? Maybe you do not have children? Either way, you might better enjoy a neighborhood that boasts eclectic restaurants, high-end shopping districts and plenty of nightlife. Are you seeking a neighborhood in which you can walk to restaurants, shops and public transportation? Then a transit-oriented development — single-family homes or condominiums located within walking distance of shops, bus stops and train stations — might be the best choice for you. The good news is that it is easier than ever to research potential neighborhoods. The Internet allows you to uncover information about housing prices, schools, recreational offerings, restaurants and shopping districts. Be sure, though, to also visit potential neighborhoods at all times of the day to make sure they are a fit for you and your family. Matching your life and lifestyle Once you’ve isolated the neighborhoods that most interest you, it is time to start considering specific residences. To help narrow down home choices to those that are for you, take a long look at your lifestyle. Are you growing a family? Do you have young children? Then you might need a home that features a large backyard and plenty of extra space for playrooms and study areas. Are you an empty nester? Then you might prefer a smaller home with less of a backyard. That means less maintenance, giving you the freedom to spend your extra time however you’d like. Your health plays an important role in selecting the right home, too. If you struggle to walk upstairs, for instance, you’d probably be better off choosing a ranch home, first-floor condominium or some other property that doesn’t require you to stomp up staircases every day. Type of property You’ll have several types of properties from which to choose from when searching for a home. A traditional single-family home might be perfect if you are raising children that need plenty of room. However, if you have a smaller family, a townhouse or condo might fit. While single-family homes come with the advantage of space and land, condos and townhouses often require less maintenance. Choosing a home can be an overwhelming task. You can eliminate much of the uncertainty however by first determining what type of neighborhood, home and property type makes the most sense for you and your family.

Finding the Right Home

View Resource Finding the Right Home
As a savvy consumer, you should always be looking for ways to shave some money from your monthly budget. Even small adjustments can add up to significant savings over the course of a year, a decade, and a lifetime. For most households, your mortgage will be the largest bill you have each month. Therefore, it is one of the best places for you to look to save money. When you are planning to obtain a mortgage, either for a new home purchase or refinance, it pays to do your homework and get the mortgage that will cost you the least in the long run. You probably already know that you should get interest rate and closing cost quotes from multiple lenders and compare them to help you choose which lender to use. Another way you may be able to save money is by buying down your interest rate with points. How buying down the interest rate with points works Points, also known as discount points and loan origination fees, are a form of prepaid interest on a mortgage. One point costs you 1% of the loan balance, which you pay at the time of your settlement on the home. Each point buys down your interest rate by an amount determined by the lender, usually approximately 0.25%. For example, say you were planning to purchase a home with a 30-year, fixed-rate mortgage of $150,000 at 4.5% interest. Your lender might tell you that you could purchase one point for $1,500 and buy down your interest rate to 4.25%. You would pay that $1,500 at closing, and the lender would base your monthly payment on the mortgage amount of $150,000 and interest rate of 4.25%. You can purchase more than one point if you would like although the amount each point will buy down your interest rate may vary. Get a quote in writing from your lender as you are making your decision. If you cannot afford to pay the points out of pocket, you may want to consider writing an offer that includes the seller paying for one or more points. Motivated sellers are often willing to do this to help find a buyer for their home. When is it a good idea to buy points? Buying points can save you a lot of money, provided you keep the mortgage long enough. In the above example, your monthly mortgage payment would be $760 without buying any points, compared to $738 if you buy one point. This saves you $22 on your mortgage payment each month. However, remember that the point cost $1,500 upfront. Therefore, it would take 68 months or about five and a half years, to break even. If you plan to keep your mortgage at least that long, you will come out on top. If you plan to itemize your deductions on your income tax return, you can typically deduct the cost of the points in the tax year you pay them because they are considered to be mortgage interest. This can reduce your taxable income for the year of your purchase and, in effect, partially pay you back for the money you spent on the points. One interesting case in which buying points can help is if you are trying to buy a home that would require a mortgage slightly larger than the amount you qualify to borrow. Lenders limit your allowed monthly housing payment to 28 percent of your gross monthly income, and if your payment would be more, you may have a difficult time qualifying for a mortgage. However, if you have cash on hand to pay one or more points, you can buy down the interest rate to get your monthly payment within the necessary qualification limits. When might you not want to buy points? If you are not sure how long you will live in the house, or if you plan to move or refinance within the next five years, you should not buy points. In addition, if you are getting an adjustable-rate mortgage, you should not buy points because points do not affect the interest rate once it begins to adjust. Lastly, buying points is not a good idea if you do not have money to pay for them at closing and can’t get the seller to cover the cost.

Buying Down an Interest Rate with Points

View Resource Buying Down an Interest Rate with Points
You’ve paid down a significant amount of your mortgage. Since you have, you now have an equally significant amount of home equity. This is good news. Home equity provides you with a measure of financial freedom. You can borrow against this equity to help pay for your children’s college education, fund a major kitchen remodel or pay off your high-interest rate credit cards. It is possible, though, to mis-use your home equity. Remember, home equity loans, or lines of credit use your home as collateral. This means that if you miss payments on a home equity loan or home equity line of credit, your lender could take your home from you. Fortunately, using home equity wisely just takes a bit of good financial sense. Using your home equity You have two choices when you want to borrow against your home’s equity. You can either take out a home equity loan or a home equity line of credit. With a home equity loan, you receive a lump sum payment for whatever amount you borrow, based on the amount of equity you have available in your home. You then pay back the money you borrow, usually at a fixed interest rate, each month, much like you do with your first mortgage. A home equity line of credit works more like a credit card. Your existing home equity determines the size of the line of credit available to you. You can then borrow up to that maximum line of credit as often as you like. You do, though, have to pay back the amount of money you borrowed, with interest. If you have a home equity line of credit of $100,000, and you borrow $10,000 to pay for a bathroom renovation, you’ll have to pay back that $10,000 in monthly installments. You’ll still be able, though, to borrow up to $90,000 more before maxing out your credit. Being smart Of course, some uses of home equity are better than others. For instance, if you take out a home equity loan or home equity line of credit, it is usually smart to use the funds to pay for a major home improvement project. That is because if you improve your home, you’ll also be increasing its value. This, in turn, boosts the amount of equity you have in your residence. Be sure, though, to invest in a home-improvement project that boosts your home’s value. Kitchen updates, the addition of bathrooms and the addition of master bedrooms usually add to the value of a home. Certain cosmetic changes such as new carpeting or landscaping might not. It might also make good financial sense to use a home equity loan or line of credit to pay off your credit card debt. That is because the interest rates attached to home equity loans or lines or credit are usually far lower than are the ones that come with credit cards. It is better to pay back a $50,000 home equity loan with a rate of 6 percent than credit card debt with a rate of 17 percent, a figure not overly high for standard credit cards. Again, though, caution is in order: If you do use your home equity to pay off your credit card debt, don’t run up even more credit card debt in the future. You’ll need to change your spending habits to make this move truly pay off in the long run. It might also make sense to use your home equity to make an investment that will pay off for you in the long term. For instance, some homeowners might tap their home’s equity to invest in rental property that will both generate monthly rental income and, hopefully, grow in value over the years. Be careful There are potential drawbacks with borrowing against your home equity. The most serious is the threat of losing your home. If you miss your credit card payments, you’ll be saddled with an often excessive penalty and a hike in your interest rate. However, if you cannot make your payments on a home equity line of credit or loan, your lender could take your home. So only borrow against your home equity if you are certain that you’ll be able to pay back the loan on time.

Using the Equity in Your Home Wisely

View Resource Using the Equity in Your Home Wisely
One of the great benefits of owning a home is that as you pay off your mortgage loan you build up equity. What exactly is home equity? Simply put, home equity is the amount of your home you own. In other words, it is the difference between how much your home is currently worth and how much you owe on your mortgage loan. It is important to know your equity, because you can use your home’s equity as a financial tool. You can take out home equity loans or home equity lines of credit to help pay for your children’s college education, fund the addition of a new master bedroom or pay down high-interest-rate credit card debt. However, until you understand exactly how much equity you have, you will not be able to use this financial tool effectively. Determining your home equity It is relatively easy to determine how much equity you have in your home. Though to get an accurate figure, you’ll need to enlist the services of a real estate appraiser. This professional will study your home, and surrounding homes, to determine what your residence is worth in the current market. This is not free. Depending on the size of your home, you can expect to pay an appraiser about $400 to come up with a market value. Once you have this market value — you can also estimate your home’s current market value yourself by analyzing recent home sales in your neighborhood — you can calculate the amount of equity you have in your residence. Say you owe $200,000 on your mortgage and your home is now worth $300,000. That is an easy one: Your home equity is $100,000. If housing prices fall, it is possible to have negative equity, or to be ‘upside down’ on your mortgage. Say you owe $200,000 on your mortgage but because of falling home prices in your community your house is only worth $150,000. You now have a negative equity of $50,000. Types of home equity debt If you have positive equity, you can turn it into cash through a home equity loan or home equity line of credit. If you take out a home equity loan, you’ll receive a one-time lump sum of cash that you then pay back over a set amount of time, usually 10 or 15 years. This loan will come with a fixed interest rate, meaning that you’ll make the same payment each month. A home equity line of credit works more like a credit card. With a line of credit, you can borrow up to a certain amount of money for the term of the loan, a term set up by your lender. If you have a $50,000 home equity line of credit, you can borrow $10,000 to pay for a kitchen renovation. You’ll then owe the $10,000 that you’ve borrowed. However, you’ll still have $40,000 left on your line of credit. This means that you can borrow as much as $40,000 to pay for other expenses. Keep in mind, though, that, like a credit card, you will not be able to borrow anything if you’ve maxed out your line of credit. Until you repay that $10,000 you borrowed, you’ll only have access to $40,000. Home equity debt is a useful financial tool. However, you do have to be careful. The collateral for home equity lines of credit or home equity loans is your home. If you miss payments or can’t pay back the money you’ve borrowed, you could lose your home.

Understanding Home Equity

View Resource Understanding Home Equity
What’s the top benefit of owning a home? Many would point to the equity you gain as you steadily pay down your mortgage. For instance, if you owe $100,000 on a home worth $150,000, you have $50,000 worth of equity. You can tap into that equity to help pay for your children’s college tuition, fund the cost of a master bedroom addition or pay down your high-interest-rate credit card debt. The best news? You have several choices for how to access your home equity. Two of the most common are home equity loans and cash-out refinances. Which of these two options is best for you? As always, it depends on your personal financial situation and your goals. Home Equity Loans A home equity loan is a second mortgage. Say you have $50,000 worth of equity in your home. Your mortgage lender might approve you for a home equity loan of $40,000. Once you take out this loan, you’ll receive a lump-sum check for the $40,000, money that you can spend however you’d like. You do, of course, have to pay that money back. You’ll do this in the same way you’ve been paying your first mortgage: You’ll make regular monthly payments. Your home equity loan will come with a set interest rate and a set payment each month. You’ll make these payments until you pay off your home equity loan in full. Cash-Out Refinance A cash-out refinance is significantly different from a home equity loan. While a home equity loan is a second mortgage, a cash-out refinance replaces your existing home loan. In a cash-out refinance, you refinance your existing mortgage into one with a lower interest rate. However, you refinance your mortgage for more than what you currently owe. For example, say you owe $100,000 on your mortgage. If you refinance for a total of $150,000, you receive $50,000 in cash — that you can spend on whatever you want. You then pay back your new mortgage of $150,000. Pros and Cons Both cash-out refinances and home equity loans come with pros and cons. On the plus side, you’ll usually receive a lower interest rate when you apply for a cash-out refinance. That can result in lower monthly payments. On the negative side, refinancing is not free. In fact, the Federal Reserve Board says that homeowners can expect to pay 3 percent to 6 percent of their outstanding mortgage balance in closing and settlement fees when financing. The interest rate on your existing mortgage, then, becomes a key factor whether a cash-out refinance is a better option than a home equity loan. If your current interest rate is high enough so that refinancing to a lower one will lower your monthly payment by $100 or more a month, then a cash-out refinance probably makes sense. That is because you’ll be able to save enough in a short enough period to cover your refinance costs. Once your monthly savings cover those costs, you can begin to benefit financially from your lower monthly mortgage payment. If refinancing will only save $30 or $50 a month, then it is unlikely that you’ll save enough each month to recover your refinancing costs quickly enough to reap the financial benefits. In such a situation, a home equity loan is probably your better financial choice. A home equity loan might make sense, too, when you’ve already held your home loan for a significant number of years. For instance, if you’ve been making payments on your 30-year fixed-rate mortgage for 20 years, you are at the point where more of your monthly mortgage payment goes toward principal and less toward interest. If you are in such a situation, it might make more sense to consider a home equity loan than a cash-out refinance. Your best option, though, when considering the many ways to tap into your home equity is to meet with a skilled financial planner. This professional can take a look at your existing mortgage and your household finances to determine which method of accessing your home equity makes the most financial sense for you and your family.

Cash-Out Refinancing or a Home Equity Loan?

View Resource Cash-Out Refinancing or a Home Equity Loan?