If you own a home, one of the perks is being able to utilize the equity to help meet your financial goals. When it comes to leveraging your home’s equity, homeowners have a few choices, including a cash-out refinance and a Home Equity Loan.
These are the two most popular options for homeowners, but they're quite different in respect to the way they work. It's important to educate yourself on the details of both to see which option best suits your needs and financial goals.
What is a Cash-Out Refinance?
A cash-out refinance is a Mortgage refinancing option in which you are obtaining a new home loan for more than what is currently owed on the home. The Mortgage will be used to pay off the existing home loan and the remaining money is paid out to the homeowner.
Basics of Cash-Out Refinance
A cash-out refinance is not the same as a standard Mortgage refinance. With a standard refinance, the homeowner is trading in their current Mortgage for a new one at the same amount. With a cash-out refinance, the amount of the home loan changes to a larger amount, and you receive a cash payout for the difference between the two loans.
Strategic Uses of Cash-Out Refinance
Once you receive your funds, there are several strategic ways to use the extra money, including these options.
- Consolidating Debt
Using funds from a cash-out refinance as a means to combined multiple debts into one simple payment makes it easier to manage monthly expenses, can save you money on interest and may help improve your credit.
- Enhancing Home Value
Reinvesting in home improvements or upgrades that increases property value is a smart money move and great use of a cash-out refinance. This includes updating your bathroom or kitchen, conducting major repairs, or other home enhancements that will give you a favorable return on your investment.
- Emergency Fund Backup
Setting up a safety net for unexpected financial emergencies is also a great use of a cash-out refinance. Having easy access to this additional money means financial security for your future, giving you peace of mind knowing your family is secure.
What is a Home Equity Loan?
A Home Equity Loan, often referred to as a second Mortgage, is a loan that uses the equity in your home as collateral. A Home Equity loan does not replace your current Mortgage, it is an additional loan to your regular Mortgage.
Basics of Home Equity Loans
Home Equity Loan terms include a set amount of money at a fixed interest rate for a certain term, much like a typical home Mortgage. With good credit, the rates are usually competitive because your home is being used as loan collateral. With a Home Equity Loan, you're taking out an additional loan to your Mortgage that is based on the available equity in your home.
Strategic Uses of Home Equity Loans
Since Home Equity Loans are typically taken for a specific amount, there's often a need in mind when homeowners apply for the loan. Here are a few reasons to get a Home Equity Loan.
- Funding Large Purchases
Many homeowners use the extra cash from a Home Equity Loan to pay for purchases with predictable costs. Examples may include using funds as a down payment on an investment property, purchasing a car, or covering educational expenses.
- Pay for Unplanned Expenses
Many homeowners use the extra funds from a Home Equity Loan to pay for large expenses or for emergency situations. Examples of this may include unexpected home repairs or unplanned medical expenses.
- Consolidating Debt
Paying off high-interest debts to reduce your overall financial burden is another way to put the money from the equity in your home to good use. Getting rid of credit cards and loans with high interest rates lowers your monthly payments, and saves you money on interest.
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Comparing Cash-Out Refinance and Home Equity Loans
Accessing the equity you've built in your home can be a strategic way to pay for larger purchases, consolidate debts and create a nest egg for emergency financial situations. A cash-out refinance replaces your existing Mortgage with a new one, while a Home Equity Loan is a separate loan that you'll need to pay in addition to your original Mortgage payment.
There are some differences as well as a few deciding factors to help you choose between a cash-out refinance vs. a Home Equity Loan.
Key Differences and When to Use Each
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Interest Rates
Interest rates for a cash-out refinance may be lower than a Home Equity Loan depending on market conditions and the type of Mortgage you choose to replace your current one. However, if your current Mortgage already has a low interest rate, and you do not wish to get new Mortgage with a higher one, a Home Equity Loan may be a better choice.
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Loan Terms
Depending on your financial goals, adjusting the term of your current home loan utilizing a cash-out refi may make the most sense for you. However, if you've paid down a big chunk of your Mortgage and do not want to adjust the remaining terms, a Home Equity may be the better option.
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Impact on Existing Mortgage
A cash-out refinance means you'll have a new Mortgage for a larger amount, typically with a higher monthly payment. A Home Equity Loan keeps all aspects of your Mortgage the same, but adds another loan which requires a separate monthly payment in addition to your Mortgage.
Deciding Factors in Choosing Between Cash-Out Refinance and Home Equity Loan
Evaluating your financial goals and current Mortgage status is the best way to determine if a cash-out refinance or Home Equity Loan is best for you. Both of these options offer strategic ways to access the equity in your home, and it's important to consider which works best for your unique situation.
For more information and details on cash-out refinances, contact our Mortgage Service Department at 770.580.6098 or mortgage@peachstatefcu.org. If you'd like to learn more about Home Equity Loans, contact Loans By Phones at 770.580.6000. We offer competitive low interest rates, flexible terms, and easy online applications that are just a click away!
