Home equity loans and cash-out refinance loans both allow you convert the equity in your home to cash you can access immediately. Either option can provide you with the funds for renovations, repairs, debt consolidation or anything else you need.
Here, the Integrity First Lending team looks at the differences between the two types of loans and shares expert insights on how to decide on the best way to borrow against the equity you have in your home.
A home equity loan (HEL) is a second mortgage, one that does not alter the terms or conditions of your current mortgage. As it is a completely separate loan, an HEL comes with a separate payment.
The amount you can borrow varies by lender, but is usually between 75 and 90 percent of the equity you have built. The proceeds are paid out in a single lump sum.
A cash-out refinance loan replaces your current mortgage with a loan for an amount higher than what you owe. With this option, you will end up with just one mortgage payment.
At closing, you will receive the borrowed funds in a lump sum. As for how much you can borrow, that depends upon the loan type. Most require that you leave some equity in the home, but you may be able to get a cash-out loan for 100 percent of the value in your home.
If refinancing would mean taking a significantly higher mortgage interest rate, an HEL may make better sense. The same may be true if you want a short-term loan and plan to pay if off quickly, as HELs have lower closing costs.
On the other hand, a cash-out loan might be a smarter choice if your home value has risen or if refinancing can lower your interest rate. Keep in mind, however, that this option could add extra years to your mortgage term, as it essentially resets your first home loan.
In addition, you have a third option to consider. A home equity line of credit (HELOC) allows you to tap into the value of your home, drawing out money as you need. HELOCs function much like credit cards -- as you repay the balance, the money becomes available again. A HELOC can be a good source of funds for major repairs and upgrades, but having easy access to cash can tempt some people to make unwise financial decisions.
What is the right loan solution for you? Only you can decide if a home equity loan, cash-out refinance loan or HELOC makes the best sense – but practical advice from a mortgage expert can be invaluable.
Integrity First Lending, a leading Utah mortgage broker, can help you find a financing solution that meets your needs. We can explain your options, answer your questions and assist you in shopping for a loan with the best interest rate and terms. Contact our South Jordan or Tooele office to discuss home equity loans and cash-out refinance loans today.