Understanding Cash Out Refinance Vs A Home Equity Loan

Every homeowner may have a sudden need for a large amount of money. Accessing and using the equity that has accumulated in your home is a very intelligent way to manage a financial crisis, and pay for sudden important expenses such as college tuition for your kids, or medical bills. The usual options are either a cash-out refinance of your property, or a home equity loan. Both these options, cash-out refinance and home equity accounts, are tax-deductible. However, other than that, there are a number of differences in these two modes of financing. Finding out about and comparing the relative merits of cash out refinance v/s a home equity loan, should be the first step while taking a decision.

Cash-Out Refinance

• Your existing mortgage is refinanced for an overall amount that is larger than the original, using some of the equity built up in your property as collateral.
• This option means you still have only one loan payment to make each month.
• It gives you the option of choosing from a fixed or variable interest rate loan.
• It enables you to get the cash now, and schedule payments out over a fairly long term.
• If you originally borrowed at high interest rates, have resolved credit issues or an adjustable rate mortgage, refinancing could be the better option.
• If your credit rating is better now than when you obtained the original mortgage, you would probably get better interest rates and terms with refinancing.

Home Equity Loan

• Gives you the option of borrowing either all or just part of your home equity.
• You have a choice of obtaining one loan, in a lump sum, or a revolving home equity line of credit.
• Home equity loans have fixed-rate interests, while lines of credit can give you variable-rate interest.
• A home equity loan offers the flexibility of short term and builds equity faster, since you can usually pay off the loan much sooner.
• You can reduce your monthly payments by repaying over a longer term.
• Home equity loans allow you to borrow as much as the full value of your property.
• With a home equity line of credit, you only have to pay interest on the money that you actually withdraw and use, which you can access at any time without having to reapply.
• Some home equity loans don’t require any mortgage insurance. You may not need an appraisal before you take a home equity loan.