Compare Home Equity Loan to Cash Out Refinance
Sometimes you will need money to make home improvements, to invest, to pay medical bills, or to pay for your kids’ higher education. Sometimes additional money is needed to deal with mounting debt. There are a variety of methods you can get access to your home equity such as home equity lines of credit and reverse mortgages. And you can also opt for a home equity loan. Some homeowners choose cash out refinance options. There are some significant differences between the options homeowners have. Here, we will mainly examine the differences between cash out refinance options and a home equity loan so that you can decide what option is better for your needs.
First, let us examine what a home equity loan is: this type of loan is when a homeowner makes the decision to use a home as a form of collateral when seeking a loan from a lending institution. In other words, a home equity loan is a separate loan on top of your first mortgage. A home equity loan proves beneficial when an individual is seeking to establish a new line of credit, or when the amount of money needed is a moderate amount that can be easily repaid. Usually, a homeowner might use this kind of loan option if they are considering a home renovation, to cover the costs of tuition, or often times this loan is utilized for the purposes of debt consolidation.
There are a number of outstanding advantages that homeowner’s can derive from a home equity loan. First, these loans are often associated with a fairly decent annual percentage rate. Secondly, if the homeowner happens to have bad credit, which is often the case when one is seeking to consolidate debts, he or she may still be eligible for a home equity loan. In addition, you can get a fairly big loan with this type of loan and your payments on the home equity loan throughout the year are tax deductible in some cases.
In contrast, the chief disadvantage associated with this loan is that if the borrower happens to default on the loan, the individual could lose his or her property. This is why getting a home equity loan is such a weighty decision and the money derived from the loan should not be used for frivolous purposes such as vacation, a new car or boat etc. Further, the loan payment you make on your home equity loan is in addition to your regular mortgage payments, so your monthly obligations will be higher in the future. Make sure you are comfortable with the amount of monthly repayment.
Unlike a home equity loan which is actually a second mortgage on one’s house, a cash out refinance option is a loan that serves as a replacement of your initial home mortgage. For instance, if you still owe $100,000 on a $250,000 house and you need $25,000 cash to pay your medical bills. You can refinance the mortgage for $125,000, usually end up getting a better rate on the $100,000 that you owe on the house and you get to pocket the $25,000 difference.
Therefore, cash out refinancing is actually replacement of your primary mortgage. So you are charged hundreds or thousands of dollars as the closing costs when using cash out refinancing option, while with home equity loan, you usually don’t have to pay closing costs. And you will find that most of the time, the interest rate of this type of loan is cheaper than a home equity loan, since it doesn’t makes sense to refinance a higher amount at a higher rate. Usually many home owners opt for the cash out refinancing option when their home equity is valued higher than the remainder of their mortgage: this allows for sizable loans which can be used to pay debts, and for other costly projects.
Should you choose the home equity loan or cash out refinance? You should crunch some numbers first. The answer really depends on how much you would save each month with each option and what you want to spend the money on. You can also use some Home equity loan vs. Cash out refinance Calculator online to help calculate, compare and decide.
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