A home equity installment loan or a line of credit and a cash-out refinance are all ways to access the equity that has accumulated in your home. Let’s break it down so you can determine what makes sense for your financial goals and objectives.
Home equity loans, home equity lines of credit (HELOC), and cash-out refinances are three ways to turn your home’s value/equity into funds you can use to accomplish other goals, like paying for home improvements, consolidating debt, college fund, or starting a business.
You get the cash by borrowing against your home equity, which is the difference between the current value of your home and the amount left to pay on your mortgage. Certain loan to value restrictions may apply!
Although these loans are similar, they’re not the same. If you already have a mortgage, a home equity loan or a HELOC will be a second payment to make, while a cash-out refinance replaces your current mortgage with a new one — complete with its own term, interest rate, and monthly payment. In short, it is separate from your current mortgage.
Home equity loans
A home equity loan lets you borrow a lump sum that you then pay back at a fixed rate and a fixed term. It’s technically a second mortgage, so you’ll make payments on it in addition to your regular monthly mortgage payments. However, it gives you peace of mind in a fixed rate and term.
Home equity line of credit (HELOC)
A home equity line of credit is also a second mortgage that requires an additional monthly payment. But instead of getting the cash all at once, you can borrow as needed during the draw period. Similar to a credit card. Borrow what you need. You are in control. You then repay what you borrowed plus interest during the repayment period. Unlike home equity loans, HELOCs usually come with an adjustable-rate, so your monthly payments will vary. We would be happy to explain how the rate is determined. What is powerful of the line of credit it gives you flexibility in future borrowing. Pay it back and credit becomes available again.
Please bear in mind, in the current environment, home equity products will have a quicker turnaround time, as opposed to a conventional mortgage refinance.
A cash-out refinance replaces your original mortgage with an entirely new loan. The difference between the current loan amount and the new loan amount provides the “cash out.” This is where you are using your equity! And though rates for cash-out refinances are generally higher than for rate and term refinances (meaning you are not borrowing more money), your interest rate will still probably be lower than a home equity loan or HELOC rate. The key to a cash-out refinance is that you are paying debt off! Especially while we are in this season of low rates. The real advantage of rates today is to pay off debt and keep it paid off, including credit cards. That way you enjoy these real rate advantages long term, without a need to refinance again!
What makes sense? What are the tax ramifications of one over another? Let’s connect. Let’s look at your goals, timeframes, and objectives. Then we will formulate a plan with you by what you are looking to achieve. Click here to get started.