mortgages

Home Equity Loan Vs. Refinance Money Out

By Mark Davenport 1 May, 2023 2 mins read

What are the differences between home equity loans and cash-out refinances? The only difference between these loans is how much cash you have access to. Cash-out refinances are often more costly than home equity loans. However, it is a viable option for many homeowners.

Home equity loan

If you have a strong credit score and substantial equity in your home, a home equity loan may be the better option for you. If you're looking to reduce your mortgage payment and draw funds from your equity, then a cash-out loan may be the best option. Comparing offers from multiple lenders is the best way to find out which option is best. Make sure to request an itemized list of the fees associated with each option.

The main differences between a home equity loan and a refinance cash out are the amount you can borrow and the closing costs. A home equity loan usually has lower closing fees and lower interest rates that a cashout refinance. However, you'll need to make at least two monthly payments for each option.

Line of credit

Home equity lines of credit, also called a HELOC, allow you to borrow as much money as you need. During the draw period, you'll make payments that include the principal amount and interest on the borrowed amount. Once the draw period has ended, you'll begin the repayment period, which may take up to 20 years to complete. A cash-out refinance, on the other hand, gives you a lump sum of money at the end of the refinance loan. These funds are used to pay off any outstanding mortgages and the rest are paid to you.

A home equity line of credit can be very helpful for homeowners who need cash for large purchases. You can access the money anytime you need it, regardless your financial situation. A line of credit is less costly than a refinance cash-out loan because you don't pay interest on the money borrowed.

FAQ

How do I calculate my rate of interest?

Market conditions influence the market and interest rates can change daily. The average interest rates for the last week were 4.39%. Add the number of years that you plan to finance to get your interest rates. If you finance $200,000 for 20 years at 5% annually, your interest rate would be 0.05 x 20 1.1%. This equals ten basis point.

Can I get another mortgage?

Yes. However, it's best to speak with a professional before you decide whether to apply for one. A second mortgage is usually used to consolidate existing debts and to finance home improvements.

How much money do I need to save before buying a home?

It depends on how long you plan to live there. Start saving now if your goal is to remain there for at least five more years. But, if your goal is to move within the next two-years, you don’t have to be too concerned.

Statistics

Over the past year, mortgage rates have hovered between 3.9 and 4.5 percent—a less significant increase. (fortunebuilders.com)
When it came to buying a home in 2015, experts predicted that mortgage rates would surpass five percent, yet interest rates remained below four percent. (fortunebuilders.com)
Private mortgage insurance may be required for conventional loans when the borrower puts less than 20% down.4 FHA loans are mortgage loans issued by private lenders and backed by the federal government. (investopedia.com)
Based on your credit scores and other financial details, your lender offers you a 3.5% interest rate on loan. (investopedia.com)
This means that all of your housing-related expenses each month do not exceed 43% of your monthly income. (fortunebuilders.com)