Both home equity loans and cash-out refi allow you to use your real estate as collateral to borrow money. Deciding which option is the right for you will depend on several factors. These include your current mortgage, the total equity you have in your property, the lenders’ offer, and your overall creditworthiness. This blog will compare these options to help you understand what fits your wants and needs the best.
What Is Cash-Out Refi, And How Does It Work?
Cash-out refinance is a type of mortgage loan which allows real estate owners to borrow some of their home equity by replacing their current mortgage with a new one. The new loan will be for more than your previous balance, and you will get the difference in cash. This process is often similar to getting your first mortgage and ideally requires you to get an appraisal to determine your real estate’s current value. Ideally, you can easily borrow up to 80% of your home’s total value.
However, if your LTV (also known as loan-to-value) ratio is more than 80%, you will have to pay for private mortgage insurance on your new mortgage. For instance, if your real estate is appraised for $300,000, its 80% value will be $240,000. If your current real estate mortgage balance is $200,000, you can get a cash-out refi for $240,000 and get the extra $40,000 in cash. You can then pay your loan based on your new mortgage terms. Like a purchase mortgage, you can choose between a variable-rate and fixed-rate and often 15-year to 30-year terms on your refinance. Â
What Is Home Equity, And How Does It Work?
A home equity loan is a form of the second mortgage you can get in addition to your primary mortgage. In the case of a home equity loan, a lender may allow you to borrow up to 90% of your real estate’s total value based on the CLVT (combined loan-to-value) ratio, which takes your home equity loan and the balance of your first mortgage into account. If we continue with the figures we mentioned above, if your real estate is worth $300,000, 90% of that will be $270,000. If your current balance is $200,000, you might be able to get a home equity loan of $70,000. There are also HELOC (home equity line of credit) that are similar but give you a line of credit you can borrow against instead of the entire loan amount upfront.
Getting a home equity loan can be quick if your lender does not require an in-person appraisal. You can even find lenders who cover the closing costs on loans. These loans also tend to have fixed rates and much shorter loan terms than a primary mortgage. However, you will make monthly payments on both your original mortgage and home equity loan. If you default on either loan, your lender may be able to foreclose on your property.
Comparing a Home Equity Loan with a Cash-Out Refinance
Home equity loans and cash-out refinancing can help you turn the equity you’ve built on your property into cash you can use. Several individuals use this financing for home improvements, repairs, maintenance, or other major expenses such as college costs or weddings. Though there are a few exceptions, here are a few general differences between a cash-out refinance mortgage and a home equity loan:
| Cash-Out Refi | Home equity | |
| Interest Rates | Fixed or variable | Often fixed |
| Replaces Current Mortgage | Yes | No |
| Closing Costs | Yes | A lender may cover closing costs |
| Repayment Terms | 15 to 30 years | 5 to 30 years |
| Tax Deductible | If you use the money for home improvement | If you use the money for home improvement |
Home equity loans often have a higher interest rate than cash-out refinancing as they are second mortgages. If you fail to make the payments, your lender will only get paid after the primary mortgage lender gets what they’re owed. Though the higher interest rate might be offset with low or no closing costs, you need to read the fine print on your loan terms, as several lenders will cover closing costs but ask you to repay some of the money if you pay your home equity loan early. Now you should have a clear idea of what type of loan fits your wants and needs the best. If you have more questions regarding the same, get in touch with real estate funding solutions immediately!
Real Estate Funding Solutions: We Are Here To Help You With All Your Real Estate Purchases!
If you have any doubts or questions about cash-out refinance, you can always contact the Real Estate Funding Solutions team for answers. Thanks to years of experience and training, our professionals can help guide you through the process with ease. Moreover, our experts will stay by your side until closing to ensure everything goes as planned. Call us at +1 855-913-8637 to know more!