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Refinance Mortgage And Home Equity Loan
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Cash Out Refinance Vs. Heloc (home Equity Line Of Credit): What Is The Difference?
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If you need cash and have a lot of home equity, you may want to consider a cash-out refinance or home equity loan.
Both a cash-out refinance and a home equity loan allow you to borrow against the equity in your home, using your home as collateral. A cash-out refinance is the process of replacing your existing mortgage with a new one, and a home equity loan is the second loan you take out in addition to your mortgage .
Before deciding which of these home equity products is right for you, consider the benefits and risks of both options as well as researching individual lenders.
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A home equity loan and a cash-out mortgage refinance can be used for similar purposes, such as financing a home improvement project or paying off high-interest debt. Both use the property as collateral, which puts them at risk of foreclosure if they default on any loans.
Although cash-out mortgage refinancing and home equity loans serve similar purposes, there are important differences. A cash-out refinance is the process of taking out a loan to pay off the remaining balance on your mortgage, effectively replacing your mortgage with a new loan. A home equity loan is a second mortgage that comes with a separate set of terms and its own interest rate.
A cash-out refinance pays off the remaining balance on your original home loan and replaces it with a new mortgage. The refinanced loan amount refers to the remaining amount owed on the original mortgage, plus the amount you “cash out” of the equity .
A cash-out refinance can have a different interest rate than your current one, and the loan term is usually up to 30 years.
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Some lenders and federal programs may set lower credit score requirements for a cash-out refinance. Because the refinance lender assumes the first mortgage at the time of the cash out, that lender becomes the primary lien holder in the event of default. With easier access to your home as collateral, lenders may be willing to offer lower rates than you would get with a home equity loan.
A home equity loan is often seen as a way to finance big-ticket purchases, make expensive home renovations, and consolidate high-interest debt.
This is a second mortgage against your home with its own terms and interest rate that is separate from your first mortgage. By refinancing using a home equity loan, you are borrowing against the home’s equity – the difference between the home’s market value and what you owe on the mortgage. You can usually borrow up to 85 percent of the home equity. However, your loan amount also depends on other financial factors, such as your income and credit history.
Home loan rates can be higher than other refinancing options. The differences, however, vary greatly from bank to bank and over time. Home equity loans are typically repaid for up to 30 years.
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Some lenders may not charge origination fees, resulting in lower (or no) closing costs. Home equity loans also do not require mortgage insurance, unlike some cash-out refinance mortgages.
In this situation, it is cheaper to refinance with a cash refinance loan, despite the higher closing costs and the loan amount. This is because the cash out refinance interest rate is significantly lower than the home equity loan rate.
The above scenario shows the potential benefits of a cash-out refinance over a home equity loan. Cash out refinancing comes with a lower interest rate than home equity loans. Although home equity loans have lower closing costs, they become more expensive over time due to higher interest rates.
If you have good to excellent credit and can find a home equity loan with a low interest rate or a lender that pays closing costs, a home equity loan may be the right choice. However, the lower interest rates associated with a cash-out refinance are a major benefit.
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Ultimately, this is a personal decision that depends on how much equity you have in your home and your credit rating. It is equally important to consider the eligibility criteria for the two options you are likely to be approved for.
If you have a strong credit score and want to withdraw a lot of equity, a home equity loan can work. However, a cash-out refinance may be the smarter option
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