Not sure if you should get a home equity loan or a cash-out refinance? You are not alone! Learn more about these two ways to get a loan by reading this article.
Refinancing and getting a home equity loan are both great ways to help you manage your money. But it may be hard to choose between the two, and your decision should depend on what your financial goals are. You can choose a cash-out refinancing plan with lower monthly payments or a home equity loan with great tax benefits. But the choice doesn't turn out to be that easy. Here is a look at the differences between these two kinds of loans to help you decide which one is best for you.
Refinance Loan with Cash Out
Cash-out refinance is just another way of saying that you are refinancing your current mortgage to lower your monthly payment and/or interest rate and get some extra cash for things like home improvements, renovations, and the like. With cash-out refinancing, you might be able to get all of these things if you are lucky and choose the right time. Say your home is worth $300,000 and you still owe $200,000 on your mortgage. Your home equity stays at $100,000. You are free to use the rest of the equity however you want.
Mortgage Equity Loan
Most of the time, there are two kinds of home equity loans: a home equity line of credit and a home equity instalment loan. With a home equity line of credit, you borrow money based on the value of your home. Your home is the security for the loan. Most home equity plans have a set length of time, like 10 years, but the loan rates change over time. Your mortgage's interest rate and annual percentage rate can go up or down depending on how the market is doing. During the given time, you can get the money whenever you need it and only pay for what you use. Some mortgages can be paid off in full at once, while others can be paid off over a set amount of time.
An instalment loan, on the other hand, is a loan with a fixed rate that stays the same for the rest of your home equity loan terms. You pay off your loan over up to 15 years, which is also called a "closed-end home equity loan." In this type of home equity loan, you usually get a lump sum at closing that is based on the value of your home. After that, you can't borrow any more money.
Which is better?
Keep in mind that interest rates rarely act normally, no matter how much you want them to. When this happens, home equity loans may be less expensive than refinancing, even though they may be riskier. Which of the two is better should depend on the specifics of each case. For instance, if you plan to pay off your mortgage and don't need as much money, you can get lower rates and shorter terms with a home equity loan. On the other hand, with cash-out refinancing, you can get all of your money up front and pay only the agreed-upon amount of interest and principal each month. Consider your financial goals carefully and choose the one that you think will give you the best deal.
