With so many expenses these days it’s nice to know homeowners have choices when it comes to borrowing against the equity in their homes. While some will refinance and get cash out with cash-out refinancing, others will take out a home equity loan or line of credit (HELOC). But if you still haven’t refinanced because you don’t know which option is best for you, the following information can help when it comes to distinguishing the differences between these three financing options.
A cash-out refinance completely replaces your exiting first mortgage on your home with a new loan. In fact, it’s a brand new loan that not only restarts the term of the loan but can also change your interest rate and type of mortgage. When you do a cash-out refinance on your home mortgage you get a new payment amortization schedule that shows the monthly payments you’ll make to pay off your mortgage principal and interest until the end of the loan’s term.
With a home equity loan or line of credit an additional mortgage is that’s taken out on top of your original mortgage. So it’s not a replacement. A home equity loan or line of credit has its own repayment schedule and term separate from your home mortgage. This is why home equity loans or lines of credit are considered a second mortgage.
If you don’t know how you receive your money with these financing options, you’re not alone. Here’s how you receive your money. With a cash-out refinance you receive a lump sum at your closing. Your existing mortgage is paid off with proceeds from your new loan and any remaining funds are yours to spend as you choose. With a home equity loan you get a lump sum when your loan closes. With a home equity line of credit you get access to a line of credit to draw from during a permitted period. While you typically can borrow as little or as much of the maximum limit of your credit line as you like, the lender can change the credit line at their discretion.
When it comes to interest, cash-out refinancing offers lower interest rates than the other types of equity loans. But a home equity loan still offers a lower interest rate than rates offered by credit card companies and home equity loans are fixed-rate loans so you’re protected from payment fluctuations. While home equity lines of credit (HELOC) are usually adjustable-rate -loans, a fixed-rate conversion loan option is available in some cases, allowing you to convert a portion or all of your home equity line of credit owed principal to a fixed rate.
Because a cash-out refinance is a new loan, you will incur closing costs similar to your original mortgage. With home equity loans and home equity lines of credit you’ll have relatively small, if any, closing costs.
Before making a decision about borrowing from your available home equity, it’s a good idea to talk with a Homestead loan officer about cash-out refinancing, home equity loans and home equity lines of credit. Everyone’s personal situations and financial needs are different and a Homestead loan officer can provide you with the information you need to determine the best financing for your situation.