Understanding the Difference between Cash-Out Mortgage Refinancing and Home Equity Loans
If you’ve lived in your home for five years or longer, you’ve probably built up some equity. With that equity, you may have the opportunity to either refinance or take out a home equity loan to put some extra cash in your pocket quickly. These aren’t the same thing, although the result of both can afford homeowners the ability to pay for things like home improvement projects or paying down other debts.
Here, we explain the differences between cash-out mortgage refinancing and home equity loans. We will also explain the pros and cons for each, as well as when to use one versus the other.
What it Means to Refinance Your Mortgage
To put it simply, mortgage refinancing replaces your current home loan with a new one. It can mean better terms and lower rates for your mortgage, and can also offer the chance to take money out of your home. This is called “cash-out” refinancing, and it is a great option if you are looking for a quick way to get a cash payout without selling your home.
Pro-Tip: There are many factors that will determine what you can achieve by refinancing. Before you speak with a mortgage professional about your options, be prepared to share information about your monthly payment, interest rate, home’s current value, and remaining balance on your loan.
Understanding Home Equity Loans
A home equity loan is a means of borrowing a lump sum using the equity you’ve paid into your home. The amount you can borrow will depend on your equity, meaning your home's current value minus what you still owe. How much you can borrow, and the terms of the loan will depend on things like your credit score, current interest rates, and the health of the housing market. Home equity loans are a great way to get cash for things like debt consolidation, paying for a child’s education, or even investing in your home.
Explaining the Differences
If you are interested in taking cash out of your home, here are some things to consider as you weigh your options:
What You’ll Be Responsible for Repaying
If monthly expenses are a concern, there are a couple of things to note. Mortgage refinancing simply replaces your existing home loan with a new one. If you take out a home equity loan, however, you will be creating a new loan that must be paid in addition to your current mortgage.
Pro-Tip: Remember, taking on a new monthly expense for home equity loan does not necessarily mean you’ll be paying more each month. Many people use home equity loans to consolidate other debts and end up enjoying a single, lower monthly payment.
Total Possible Costs of Your Loan
Although refinancing your mortgage to a lower rate is probably going to mean a smaller monthly payment, there are still some costs associated with the loan. You’re still going to run into closing costs so it’s important to speak with an experienced mortgage professional about how much you could actually expect to save in the long run by refinancing. If you are nearing the end of your mortgage term, you may find that the monthly savings may not total up to an amount greater than the loan’s closing cost – meaning you’d actually end up paying more! Consider all of your expenses altogether to ensure you don’t ended up overpaying.
If the closing costs are enough to keep you from refinancing, you still have the option to take out a home equity loan – especially if your home loan is anywhere close to being paid off. The home equity loan will create another monthly expense for you in addition to the remaining payments on your mortgage. However, home equity loans tend to have much lower closing costs so the total amount you’ll pay over time for your loan – including interest on the loan itself – may end up being considerably less than refinancing your mortgage.
Choosing which Option Meets Your Needs
There are many factors to consider when choosing between a cash-out mortgage refi and a home equity loan. Make a list of your own pros and cons to determine which makes the most financial sense for you. Some important considerations include:
- Your credit score
- Amount of equity in your home
- Current interest rates
- Your ability to meet monthly payment requirements
- Reason for your loan
- Your short and long-term financial goals
Responsible Uses for Your Home Loan
Whether you decide to refinance or take out a home equity loan, you need to have a plan for how you’re going to use the money. Here are a few things you could do in the next few months that might help improve your financial outlook for years to come. Consider any of the following:
- Completing home renovations or improvements
- Consolidating other debts and paying them off more quickly
- Credit cards
- Student loans
- Medical debts
- Auto loans
- Purchasing an investment property
- Building your savings
- Invest in them market
Where to Start
If you have financial goals in mind but aren’t sure where to begin, we can help. Our team of professional loan advisors is always ready to discuss your goals, learn your situation, and help you make a plan for the future. Complete the form below to speak with a friendly, professional advisor and start mapping out a plan towards a brighter financial future!