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Cash-out Refinance Versus Home Equity Loans
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Let's say you have a home that's worth $150,000 and you owe $100,000 on the mortgage. That means you have $50,000 of equity in your home, which is like having $50,000 in a savings account. A Cash-Out Refinance allows you to access that equity. For instance, if you need $10,000, you can refinance your mortgage so that you owe $110,000 and the lender then gives you $10,000 in cash at closing.
With a Home Equity Loan, you keep your original mortgage and take out a second mortgage for the amount of equity you are tapping into.
Since every homeowner's situation is different, your best option will depend on your specific circumstances. Whether you choose a cash-out refinance or a home equity loan, there are four things to consider:
Speed
How fast do you need the money? Home equity loans close considerably faster than a refinance - in as little as five days. That might be important to you.
Cost
Home equity loans typically require minimal fees. Refinancing, on the other hand, may carry higher loan fees and possibly points.
Because a home equity loan is a second mortgage, it typically has a higher rate than a cash-out refinance (a reflection of its higher risk to the lender). But if you already have a great rate on your mortgage, it may be worthwhile to get a home equity loan — even at a higher rate — rather than refinance and lose the low rate you already have on your first mortgage.
Cash Out Refinance
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Cash received when you refinance your existing loan with a loan that is larger than the balance of your current mortgage, based upon the equity you have already built up in the house. The cash out amount is calculated by subtracting the sum of the old loan and fees from the new mortgage loan.
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For example, if your existing loan is $100,000, you might refinance it with a loan of $120,000. After you pay off your current loan ($100,000) and any loan-origination costs for the new loan (for example $2,000 in points), you would be left with $18,000 cash out.
Cash-out loans may not be available for all types of property.
Points (or Discount Points)
Points are an up-front fee paid to the lender at the time that you get your loan. Each point equals one percent of your total loan amount. Points and interest rates are inherently connected: in general, the more points you pay, the lower the interest rate you get.
Second Mortgage
An additional mortgage placed on a property that has rights that are subordinate to the first mortgage. A second mortgage is a lien in which you are given a lump sum amount that you pay off in installments over a specified period of time. Home improvement and debt consolidation loans are considered second mortgages.
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