Cash-Out Refinance vs Home Equity Loans
Contributing time and money to your house can look like different things to different people – the mortgage payment, of course, a coat of paint, or perhaps a new deck. The end result of these investments is adding equity and value to your home.
It really is like a savings account with a roof.
When circumstances arise where you need to make a withdrawal from that virtual account there are a few different ways to go about it, along with pros and cons for each. These options include a cash-out refinance, home equity loan, or a home equity line of credit.
Cash-Out Refinance vs. Home Equity Loan vs. Line of Credit
• As we’ve discussed before, a cash-out refi is taking the difference of your new mortgage and your home’s value in cash. You’ll need sufficient equity – usually about 20% – to pursue this avenue. The reasons could be consolidating your debt, doing some major home improvements, or perhaps helping with a new graduate’s higher education. It can also be a by-product of acquiring a lower interest rate and reducing your monthly payment as well.
• A home equity loan is also taking advantage of the equity you’ve built in your home. However, you’re taking out an additional loan which is why they’re often referred to as a second on your home. They’re not offered by banks as much as they once were.
• A home equity line of credit – or a HELOC, as you’ll see them referred as – is similar to having a credit card on your home’s equity. Most have an adjustable rate and interest only payments for a limited time. Borrowers can draw from the funds as needed, rather than borrow the whole amount.
So, which is better – cash-out refinance or home equity line of credit? It depends.
The HELOC can be attractive for homeowners with solid income and credit standing, and those who wish to borrow a smaller amount for a shorter time. These loans offer a limited “draw” period in which funds can be accessed as needed. This can be beneficial if you’re unsure of your needs, but borrowers who find it a little too tempting to withdraw may find their debt increased before they know it.
Then there is a limited time in which to pay it off. Because of these restrictions plus easy access, you could find it harder to pay off the loan. If your circumstances change before the term is up, you risk defaulting on a loan that is also tied to your home. The same potential for liability is there for the home equity loan, aka second mortgage.
Tapping your home equity with a cash-out refinance can be the way to go when you need a larger amount and you plan to stay in the home long enough to recoup any closing costs and fees. Current low interest rates for refinancing are competitive with those of HELOCs and home equity loans, but lack the risk of another large debt and additional monthly payment.
How much you can cash out on a refinance depends on your loan-to-value ratio (LTV) and current equity. You also have the option of treating the cash from a refi like a HELOC, by putting it into savings and drawing as needed.
If you still have questions about the differences between ways to access the equity in your home, we have answers. Our team at EnTrust Funding can sit down and discuss the most practical options for your individual situation and needs. Give us a call today!