If you have a big expense coming up, maybe a tuition payment, renovation plans, or even debt consolidation, you have some options if you own your home. With as little as 20% equity in your property, you can secure a cash-out refinance or a home equity loan. Here’s the difference and what you need to know to decide which option is best for you.
This type of refinancing starts when you have equity in your home. With a new mortgage loan for the current value, you can take the difference between the old loan and the new one in cash. Remember, with a new, higher loan, your mortgage payments will increase, and your repayment term will restart. You’ll also have to retain some equity in your home, generally 20%, meaning you won’t be able to refinance the entire value. One of the benefits of cash-out refinancing is the ability to access a lump sum of cash at a low interest rate. One of the drawbacks is that using your home as collateral for a loan is risky, and you also face significant closing costs with this type of refinancing.
Like a cash-out refinance, a home equity loan uses the equity in your home to secure a loan. The difference is that a home equity loan is separate from your mortgage. Instead of replacing your mortgage, the loan borrows against your home’s equity. The amount a lender will approve for a home equity line of credit depends on your credit score and the equity you have in your home. This type of loan generally carries a higher interest rate than a cash-out loan because it’s a second loan and not a primary mortgage, but you still get a cash payout when you secure the loan.
Whatever you need money for, whether a home renovation, medical care, college funding, or even a trip around the world, there is a loan out there for you. Contact Midland Mortgage Corporation to learn more about the difference between a cash-out refinance and a home equity loan to help you reach your goals.