Getting Cash Out of Your House

Cash-Out Refinancing vs. Home Equity Loans

By JJ Singh
California Mortgage Rate Columnist

If you own your home and need some cash, you face two attractive options: cash out refinancing or a home equity loan. Which you choose depends on how you prioritize your options.

Home Equity

Home equity is the difference between the value of your home and what you owe the bank. If your home were worth $250,000 and you were still paying down a mortgage of $100,000, your home equity would be $150,000.

You can usually turn that equity into cash by either refinancing your home or obtaining a home equity loan.

Cash Out Refinancing vs. Home Equity Loans

Refinancing your home sounds a lot more complex than it actually is. As in the example above, you could obtain a completely new mortgage for $220,000. $100,000 of that money would immediately be used to pay off your old mortgage and you would receive $120,000.

A home equity loan on the other hand, allows you to retain your original mortgage. You would get a second loan up to the amount of equity you have in your home, thereby giving you in essence two mortgages.

When deciding which to choose, there are 3 key criteria:

  • Term. By refinancing, you are likely to lock yourself into a 15 or 30-year term. Home equity loans are more flexible.
  • Rate. While home equity loans have more flexible terms, they also tend to have slightly higher interest rates. On the other hand, refinances tend to carry additional fees such as points and closing costs.
  • Speed. Refinancing is a longer process and is more rigid. Remember all the steps you took to get your original mortgage? With a refinance, you are basically getting a new mortgage and will need to follow those steps again.

Choosing the right loan type depends on which criteria are most important to you. After prioritizing your options, you'll be well on you way to using your home's equity to get the financing you need.

Sources:
www.bankrate.com

About the Author
JJ Singh is a returned Peace Corps Volunteer, formerly stationed in Bolivia. Previously, he has worked as a consultant for an international development bank and as an interpreter and docent at a historic site in Virginia. JJ has a degree in economics from the University of Virginia and studied part-time at the University of Valencia in Spain.

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