Home Equity Loan VS Cash-out refinancing
Your property isn’t just a place to live nor just an investment. Your home can become a handy source to deal with the unexpected.
Home equity loans and cash-out refinancing are two ways to turn your home’s value into essential funds to reach your goals, like paying for household improvement or repair and consolidating debt.
Practically speaking, you can reach into your financial assets by borrowing against home equity.
Your home equity comes from your original down payment, paying down your loan, and increasing property value. Putting your house up for sale, of course, is one way to efficiently convert your equity into cash. But, if you’re looking into ways to tap into those extra funds without selling, you may consider a home equity loan or refinance.
Although these loans are similar, they aren’t quite the same. A home equity loan will be an additional payment along with your primary mortgage payment. A traditional home equity loan is quite similar to a second mortgage payment. At the same time, a cash-out refi replaces your mortgage with its own terms, interest rates, and monthly payments.
Comparison of Home Equity Loan VS Cash-out refinancing
A home equity loan lets you obtain a lump sum to pay back at a fixed rate. It’s technically a second mortgage, so you’ll make payments in addition to your regular monthly mortgage payments.
This option often best suits borrowers who have a substantial amount of equity available to them. The amount you’ll borrow will be determined by your CLTV ratio, which must be under 90%.
If your home is worth $300,000 and 90% of that is $270,000, the amount you owe on your house is $200,000, you may be eligible for a home equity loan of $70,000.
When you add a second mortgage to your home, your primary mortgage remains unchanged, but you’ll now have two payments to make!
Home equity loans gravitate towards higher interest rates than refinancing. The lenders are taking a bigger risk when you enter a second mortgage payment. The lender will only get paid after the primary mortgage holder gets what’s owed in the case of a foreclosure. Even a reliable homeowner may default with a secondary payment!
Home equity loans have a rigid interest rate and shorter terms than your primary mortgage. The loan will let you borrow a lump sum based on the equity of your house. As discussed earlier, the second lender can foreclose on your home if you default.
Getting a home equity loan may be quicker if the lender doesn’t require a full appraisal and some lenders may even cover the closing costs. Low or no closing costs may offset the higher interest rate.
What is the difference between Home Equity Loan VS Cash-out refinancing?
When you elect to use a refinance loan, you enter a whole new loan agreement. This means new terms, rates, and repayment plans ideally at a lower interest rate.
The loan refinances your first mortgage into a larger one and allows you to receive the difference in cash. The proceeding is like your first mortgage and generally requires a professional evaluation to evaluate your home’s market value. Generally, you’ll be able to negotiate a new loan up to 85% of your home’s value. You may also need private mortgage insurance, depending on your LTV ratio.
Like a purchase mortgage, you’ll have between 15 to 30 years to refinance with a fixed or variable interest rate. When you refinance your loan, you can opt to keep your original term, have a shorter one or lengthen the period. Ideally, you’ll qualify for a lower interest rate to save money in the process. It’s a bit easier to be eligible for a refinance as you replace your primary mortgage and there is no risk of a second mortgage.
While the interest rates are generally lower for cash-out refinances, closing costs are usually higher and vary between 2% and 4%. Additionally, you will create new escrow accounts but whatever is in your current escrow account will be refunded once the current loan is paid off. If you intend to reside in your home long enough to break even, the cash out might be the solution for you.
Deciding between a home equity loan and refinancing can depend on several variables. How much equity you’ve built in your home, your debt-to-income ratio, your creditworthiness, and your lenders. A personalized approach to investing doesn’t need to be complicated. Talk with a local Lender to help decide which option makes the most sense for your financial future. Feel free to call The Cain Mortgage Team for a free consultation!