Which Is Better Refinance Or Home Equity Loan

What is a home equity loan?

Often called a second mortgage, a home equity loan allows you to borrow against part of your equity in your house and receive a lump sum of money. These loans are usually fixed-rate.

This is typically associated with your existing mortgage, and the total of your current mortgage plus your home equity loan can add up to approximately 85% of your home’s appraised value, though the precise amounts may vary depending on your circumstances and the lender.

Suppose, for instance, that you have a home valued at $1 million and $500k left on your mortgage. In that case, you could take out a $350,000 home equity loan, meaning you would be borrowing 85% of the total value of your home.

What is cash-out refinancing?

Although a home equity loan can coexist with your existing mortgage, cash-out refinancing typically entails taking out a larger new loan in place of your mortgage. You may then withdraw the amount you borrow above your mortgage balance as cash.

Typically, a cash-out refinance has a limit of 80% of the value of your home, though this can change from time to time. And the interest rate can either be fixed or variable.

For instance, you could do a cash-out refinance for $800,000 if your house is worth $1 million and you still owe $500,000 on your mortgage. After paying off your current mortgage, you would have $300,000 in cash left over.

However, instead of the $500,000 you had before, your total debt would then be $800,000. The fact that you would be paying interest on the entire amount could influence how much money you choose to withdraw.

When it may be better to use a home equity loan

You might be better off using a home equity loan if your present mortgage terms are satisfactory to you but you still want to access cash from your home equity.

Your home equity loan interest rate may be substantially higher than your mortgage rate due to the general increase in interest rates over the past few years. However, that home equity loan would only make up a portion of your debt (and the interest rate would probably still be lower than that of credit card and personal loan alternatives). By using a cash-out refinance, you wouldn’t completely replace your current mortgage with a loan that might have a higher interest rate. Instead, you would keep your current mortgage.

When it may be better to use a cash-out refinance

A cash-out refinance might be a better option if you wish to access some of your home equity and refinance your current mortgage, such as if you recently took out a mortgage at a higher interest rate than current offers.

You may also choose to modify your mortgage terms during a cash-out refinance in order to pay off your loan more quickly. For example, you may choose to go from a 30-year mortgage to a 15-year mortgage.

Compared to home equity loans, cash-out refinances typically have lower interest rates. To find out what would be more costly overall, though, you would need to do the math. Examine the total expenses of a cash-out refinance versus the total expenses of your present mortgage plus a home equity loan.

Homeowners can obtain cash through cash-out refinances and home equity loans, but there may be additional costs involved. If you decide to take out a loan using one of these methods, think about all of the expenses involved rather than just the headline figures.

If a cash-out refinance is used to replace a low-interest mortgage, the total cost may be higher even though the interest rate on the refinance may be lower than on a home equity loan. However, in other situations, a cash-out refinance could provide you more flexibility by allowing you to take out cash while assisting you in adjusting to better mortgage terms.

Consider what makes sense for your circumstances and consult with a counselor who can assist you in weighing your options for borrowing. Thanks for reading CBS NEWS. Create your free account or log in for more features. To proceed, please enter a valid email address. Please enter email address.

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FAQ

Can I take equity out of my house without refinancing?

Is it possible to remove equity from your home without refinancing? Yes, there are ways to remove equity from your home besides refinancing. These consist of reverse mortgages, sale-leaseback agreements, home equity investments, home equity loans, and home equity lines of credit (HELOCs).

Is refinancing for equity a good idea?

If you can get a better rate now than when you took out the loan, that is when it makes the most sense. Borrowers who wish to access more of their equity or move from an adjustable rate to a fixed rate may find refinancing to be a wise decision.

How is a $50000 home equity loan different from a $50000 home equity line of credit?

A home equity loan functions more like a mortgage, but a home equity line of credit (HELOC) functions similarly to a credit card, offering you a maximum loan amount with a variable interest rate. You receive a one-time payment in full, which you must repay over time at a predetermined interest rate.

Is it easier to get a home loan or refinance?

Refinancing would probably be simpler for you than applying for a loan as a first-time buyer because you already own the property. Furthermore, refinancing will be simpler if you have owned your home or property for a long period and have amassed a sizable amount of equity.

Read More :

https://www.cbsnews.com/news/home-equity-loan-vs-cash-out-refinance-which-is-better/
https://www.investopedia.com/mortgage/heloc/refinancing-vs-home-equity-loan/