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What is Cash for Keys?

A cash for keys offer is a deal which a bank may make with a homeowner, in which the homeowner is given a cash settlement in exchange for vacating his or her foreclosed home. Cash for keys offers are also made to renters. The advantage of cash for keys from the point of view of the bank is that it gets people out of the house quickly, and the house is often left in better condition than it would be in the event that an eviction was needed. However, it is important for people to be aware that a cash for keys offer is a last resort, because once the paperwork is signed, you typically have no recourse.
In a classic example of a cash for keys offer, the bank will initiate the foreclosure process on a home, and indicate that it is willing to pay the homeowner a set amount of cash in exchange for the keys. The cash may be based on a percentage of the appraised value of the home, or it may simply be a static payment. If the homeowner accepts, ownership of the home reverts to the bank, and a moving date is set. The time to negotiate is when the offer is made; if you feel that the offer is unfair, say so, and you may be able to get a better deal, since the bank just wants you out of the home.

In the case of renters, some banks offer renters cash for keys when they foreclose on a home to compensate the renters for their trouble. The cash for keys settlement can be used to help with moving expenses, and it is also designed to keep the renters from complaining. For renters, foreclosure can be extremely frustrating, because they may not be aware that the foreclosure process has begun, let alone proceeded to the point where they are expected to vacate a home.

Without voluntary surrender of the keys to a home, banks face a lengthy eviction process. Running an eviction is expensive, and time consuming, because while eviction notices are served and the eviction is finally enforced, the house is simply sitting there, and the bank cannot put it on the market. By getting a so-called “broom clean” house in exchange for a small cash settlement, the bank can quickly turn it around; most banks do not like to hold on to a real estate inventory, so they welcome the opportunity to sell off their foreclosed properties.
In addition to helping banks cover their losses quickly, cash for keys can also prevent damage to the house. In some cases, people who are evicted feel resentful and angry, and they may stop maintaining the house or actively damage it out of spite. As a result, a bank might need to invest in some basic repairs to make a house salable before putting it on the market, and this eats up more time and money.

Calculating your home equity

Calculating equity is simple: You take the market value of your home and subtract any outstanding mortgages or liens. So if you have a $100,000 home and there's $60,000 left to repay on your mortgage, your equity would equal $40,000.
The amount of equity you have is not constant, however. It changes depending on your home's value, market conditions, and the terms of your mortgage. The simplest way to increase your equity is to pay off your mortgage. The more you pay towards the principal, the more equity you accrue.
In the beginning, most of your payments will likely go toward the interest, so you will build equity much slower in the first couple of years in your new home. You can build equity faster if you shorten the term of your mortgage, as more of your payments go toward principal. Once you've paid off your mortgage, the lien on the title will be cleared, and you'll own 100 percent of your home.
You can also increase your home's equity by making improvements that increase its value. Be careful here, however, as you rarely recoup the full cost of renovations. The best strategy is to make renovations that bring your house up to par with other houses on the block and to avoid souping up your house with upgrades and designer appliances the rest of the neighborhood doesn't have.
Best of all, your equity may increase without you doing anything. If property values in your area increase, so will your equity, as it's based on market values. Using the above example, if property values in your area increase by eight percent, your equity would equal $48,000.
But housing market conditions are affected by a number of things, including interest rates, inflation, and the economy. And while houses tend to appreciate over time, it is possible for these conditions to lower property values, resulting in a decrease in your equity. In a worst-case scenario, this could lead to negative equity, where the amount of your mortgage exceeds the value of your home.
Negative equity can also result from an interest-only mortgage. In these cases, your monthly payments may be covering just the interest or only a portion of it. At the end of the interest-only term, you still owe the lender the principal as well as any unpaid interest, making it possible that you owe more than the market value of your home.
To help avoid negative equity, make sure at least some of your mortgage payments are going towards the principal, and try to buy a home in an area where property values are increasing.
The good news is that national home values generally appreciate by an average rate of five percent per year. And on the whole, home prices have risen steadily since 1968, increasing by 8.8 percent in 2004, according to the National Association of REALTORS®. This wealth is readily accessible through home equity loans, which tend to have lower interest rates and may have tax benefits.

How to turn your home equity into cash

Perhaps you'd like to remodel your home, fund your child's education, or buy a new car. Or maybe you need money to consolidate your debts, recover from a financial setback, or respond to a family emergency. A home loan can offer ready cash so you can address a variety of situations.

What is equity?

The source of this cash is called equity, which is the current value of your home, minus however much you currently owe on any existing mortgages or other home loans.
For example, if your home is worth $300,000 and you owe $280,000 on your mortgage, your equity is $20,000. Or if your home is worth the same $300,000, but you owe $250,000 on your mortgage, your equity is $50,000. Essentially, equity equals appraised value minus debt.
If the amount you owe on your home is more than the value of your home, this calculation would result in a negative number and your equity would be zero. This is sometimes referred to as being "upside-down" on your home loan.
Most homeowners need positive equity to borrow against their home. Those who have an exceptionally high credit score may be able to borrow up to 125 percent of the home's value, meaning that they would owe more than their home was worth.

Refinance to access your home equity

One way to turn the equity in your home into ready funds is to refinance your first mortgage for a larger amount and take the difference in cash. This option is called cash-out refinancing.
For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, you might want to get a new mortgage for $270,000. Of that amount, $200,000 would be used to pay off your original mortgage and $70,000 would be yours to use for other purposes. In this example, you would still have $30,000 of equity in your home.
A new first mortgage usually makes sense only if the interest rate on the new mortgage would be significantly lower than the rate on your current one. Essentially it allows you to "cash out" a specific sum that you'll repay over the term of your new mortgage (usually 15 or 30 years).

Line of credit offers flexibility

Two other ways to tap into equity are through a home equity loan or a home equity line of credit. A home equity loan involves a specific sum of money and a set repayment schedule. A line of credit works a lot like a credit card, but the money is secured by your home.
A home equity loan can be appropriate if you want to borrow a specific sum, say, $10,000 or $25,000, immediately, and you want to make regular monthly payments over a set period of time, such as 10 or 15 years.
A home equity line of credit is a good option if you don't know how much you want to borrow, don't need the money right away, or want to repay any money that you borrow within a short time. Some homeowners set up a home equity line of credit just in case of a future financial need.
A refinanced first mortgage will typically carry a lower interest rate than a home equity loan or line of credit, but refinancing usually includes significantly higher up-front costs. If you're planning to access your home equity, it's a good idea to compare the interest rates, costs, and monthly payments before you make a decision on which type of loan is right for you.

Home equity line of credit or a home equity loan: Which is right for you?

If you're a homeowner, you can borrow against the value of your house through either a home equity line of credit (often called a HELOC or a line) or a home equity loan (often called a HEL or loan). Both are essentially a second mortgage.

What's the difference?

A HELOC is a form of revolving credit similar to a credit card. It allows you to draw funds, up to a predetermined limit, whenever you need money. There is generally a minimum payment due each month, with the option to pay off as much of the line as you want. With a HEL, you receive a lump sum of money and have a fixed monthly payment that you pay off over a predetermined time period. In each case, the amount you can borrow is based on factors such as your income, debts, the value of your home, how much you still owe on your mortgage and your credit history.

Benefits

The appeal of both of these types of loans is their interest rates, which are almost always lower than those of credit cards or conventional bank loans because they are secured against your home. In addition, the interest you pay on a home equity line or loan is often tax deductible (consult a tax advisor about your particular situation).

Which is best for you?

Generally, a HELOC is a good choice to meet ongoing cash needs, such as college tuition payments or medical bills. A HEL is more suitable when you need money for a specific, one-time purpose, such as buying a car or a major renovation.

Comparing the costs

Both HELOCs and HELs usually carry a higher interest rate than that of a first mortgage. With a HEL, you may choose either an adjustable rate that fluctuates according to variations in the prime rate, or you may opt for a fixed rate. A fixed rate enables you to budget a set payment monthly without worrying about increasing costs should interest rates rise. With a HEL, there are also closing costs that you should consider.
A HELOC usually carries a lower initial interest rate than a HEL, but its rate fluctuates according to the prime rate, so there is more interest rate risk. Unlike a HEL, where your monthly payments are a set amount, a HELOC enables you to borrow funds as needed and repay as little as interest only each month. In addition, there are generally no closing costs when you open a HELOC.
Keep in mind, your home is the collateral for both a HELOC and a HEL. If a HELOC's easy access to cash tempts you to run up more debt than you can repay, or if you fail to make your payments, you risk losing your house.

	Home Equity Line of Credit (HELOC)	Home Equity Loan (HEL)
What you get	Revolving credit, with a specific credit limit of up to 100 percent of the value of your home (its value minus all debts against it). Some lenders will allow you to borrow up to 125 percent of the value of your home.	A fixed amount of money, up to 100 percent of your equity in your home (its value minus your first mortgage debt and other debts). Some lenders will allow you to borrow up to 125 percent of the value of your home.
How to qualify	You typically need to provide proof of your income, home ownership, your mortgage and how much equity you have in your home. An appraisal is usually required as well.	You typically need to provide proof of your income and home ownership, and proof that at least 20 percent of the value of your home is paid off. An appraisal is usually required as well.
How you repay it	Minimum payments (as little as interest only) each month; eventually you have to repay the entire sum borrowed plus interest.	Fixed payments of interest and principal over a fixed period of time.
How long it lasts	You have a 10- to 20-year period when you can draw on the line (up to the credit limit), after which you have a fixed period to pay off the outstanding balance plus interest.	The term of the mortgage can be as short as a year or as long as 30 years.
Costs and fees	Usually no closing costs, but may have an annual fee.	Closing costs that are lower than for a first mortgage.
How you receive the money	You draw funds as needed, using special checks or a credit card.	You receive one up-front lump sum.
Interest rate	The prime interest rate plus a margin (which can vary from one institution to another).	A fixed or adjustable interest rate.
Tax status	Interest may be tax-deductible (consult a tax advisor).	Interest may be tax-deductible (consult a tax advisor).

Cash credit

A cash credit is a short-term cash loan to a company. A bank provides this type of funding, but only after the required security is given to secure the loan. Once a security for repayment has been given, the business that receives the loan can continuously draw from the bank up to a certain specified amount. -prearranged loan that a business does not have to take until it is needed.

Line of credit

A line of credit is any credit source extended to a government, business or individual by a bank or other financial institution. A line of credit may take several forms, such as overdraft protection, demand loan, export packing credit, term loan, discounting, purchase of commercial bills, etc. It is effectively a bank account that can readily be tapped at the borrower's discretion. Interest is paid only on money actually withdrawn. Lines of credit can be secured by collateral or unsecured.
Lines of credit are often extended by banks and financial institutions to creditworthy customers to address liquidity problems; such a line of credit is often called a Personal Line of Credit. The term is also used to mean the credit limit of a customer, that is, the maximum amount of credit a customer is allowed.