There are many of us who consider borrowing against the equity of home. So, here are two options you can choose from:
- Cash-Out Refinancing
- Home Equity Line of Credit (HELOC)
A lot of people think a Cash-Out Refinance and a Home Equity Loan are the same thing. They both provide you access to the equity you have built up in your property. Still these both are different.
The following are the key differences between a Cash-Out Refinance and a HELOC:
Loan terms
Your existing initial mortgage is paid off with a Cash-Out Refinance. As a result, you will get a new mortgage loan with terms that may be different from your old one. This will lead to a new payment origination charge, that will show you the monthly payments required to pay off the principal and interest on your mortgage by the end of the loan term.
You can take out a home equity line of credit in addition to your original mortgage (HELOC). It is known as a second mortgage, and it will have a different term and payment schedule than your first. Certain lenders will let you receive a home equity loan in first lien status if you don’t have a mortgage and your mortgage is paid off. This means the HELOC will be your first mortgage.
How you receive your funds
Cash-Out Refinancing allows you to get a lump-sum payment after your refinance loan is completed. The remaining amount is used to pay off your current mortgage(s), including closing costs and any pre-paid expenses (such as real estate taxes or homeowner’s insurance); any remaining money is yours to use as you wish.
During the draw period, which is normally 10 years, in Home Equity Line of Credit (HELOC) you can withdraw funds from your available line of credit as needed. You will make monthly payments that include both principal and interest during this time. The repayment period begins when the draw period has ended: you are no longer able to withdraw funds and must continue paying. You have 20 years to pay back the money you owe.
Interest rates
A fixed-rate or adjustable-rate mortgage can be used for a cash-out refinance. Your lender may provide you with information on fixed-rate and adjustable-rate mortgages so you can select the best option for you.
The interest rate on a home equity line of credit (HELOC) is flexible. Your lender may also offer you the option of converting all or part of your outstanding variable-rate loan to a fixed-rate loan.
Closing costs
Closing expenses for a cash-out refinance is like those for your original mortgage.
Closing expenses for a home equity line of credit (HELOC) are normally nothing (or very low).
What is the difference?
The key distinction between a home equity loan and a cash-out refinance is that the latter transforms one mortgage into a larger one. The home equity loan generates a new mortgage on your property. You must also examine the charges connected with each of these loans. For these loans, many lenders demand hefty expenses and origination fees.
So, how do you make your decision?
If you are still unsure about which alternative to select, connect with us and we would be pleased to answer your questions.
