Cash-Out Refinance vs. Home Equity Loan

cash out refinance

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.

Cash-Out Refinance

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.

Home Equity Loan

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.

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