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Cash-Out Refinance vs. Home Equity Loan: What’s The Better Option for You?

If you’re a homeowner, you may have considered tapping into your home’s equity to secure a loan.

Two common options that homeowners use to turn equity into funds are a Home Equity Loan or a cash-out refinance. This blog will cover the basics of these two options and help you determine which is right for you.

What is a cash-out refinance?

A cash-out refinance is a specific form of mortgage refinance where a new mortgage loan replaces the existing mortgage for a larger sum than was owed previously. The borrower then receives cash for the additional mortgaged amount.

Here’s an example. Let’s say you purchased a house for $250,000. You’ve since paid off $50,000 of that amount, meaning you have a $200,000 mortgage and $50,000 in home equity. Now, you want to do a kitchen renovation that will cost $20,000.

If you used a cash-out refi, you could take out a new mortgage for $220,000, use that to pay off the existing $200,000 mortgage, and receive the $20,000 difference in cash a few days after closing.

What to consider before a cash-out refi

A cash-out refi can give you a decent sum of cash at a comparatively low interest rate (although the rate will probably be 1 – 2% higher than the first mortgage rate). It can be a smart borrowing option with a variety of uses – you can use the money for home repairs, renovations, debt consolidation, certain investments, and more.

Before you apply, there are several factors to consider. One, your new mortgage will have new terms. Depending on the rate at which you financed your existing mortgage, you’ll need to crunch the numbers to ensure the terms of your new loan make financial sense. In other words, it may not make sense to move forward with a cash-out refi if it means you will have a much higher interest rate on your new loan.

Additionally, a cash-out refi only works if you have equity in your home. Unless you have a specific qualifying home loan through the VA, you will generally only be allowed to cash out 80% of the equity that you’ve accrued.

Keep in mind that, like any new mortgage, cash-out refinances require a full home appraisal (which comes with associated costs), and it can take anywhere from 30 to 60 days for the process to be completed. You will usually pay closing costs of 1 – 2% of the home’s value at closing.

What is a Home Equity Loan?

As discussed, when you opt for a cash-out refi you are replacing your existing mortgage with a new mortgage. In contrast, a Home Equity Loan is a loan that allows you to borrow against your equity in the form of a second loan. You’ll receive the loan as a lump sum with a fixed interest rate, and you will pay it back in installments over several years. In other words, when you use a Home Equity Loan, your existing mortgage terms don’t change. You are instead taking out a second loan.

Although their uses are flexible, most borrowers use a Home Equity Loan for renovations, repairs, or debt consolidation.

Just like a cash-out refi, you can only take a Home Equity Loan if you have equity against which to borrow. You generally need to have at least 20% equity in your home to be considered for a Home Equity Loan.

What to consider before taking a Home Equity Loan

In general, Home Equity Loans are a smart, low-interest borrowing option. You can use the borrowed money for anything, and the interest rates are low in comparison to many other lending options. The interest rate on a Home Equity Loan is fixed, so you know your monthly payment won’t fluctuate.

Home Equity Loans are also easier to acquire than other traditional loans because your house is used as collateral. Since you won’t be changing your existing mortgage, Home Equity Loans can be a better option if the mortgage rates are higher than when you financed last.

Unlike a cash-out refi, Home Equity Loans through Connexus often don’t require a full appraisal, only an online valuation. There may be closing costs; however, 80% of Connexus members that used a Home Equity Loan had closing costs that totaled $600 or less. Connexus Home Equity Loans are also a quicker option than cash-out refinances, taking only 10-15 days to close once all the paperwork has been received by the lender.

Like any loan, do the math before applying to ensure that you can comfortably afford the repayment schedule. This is an especially important consideration with a Home Equity product because your home serves as your collateral.

How to get started

If you are looking to use your home’s equity to secure a loan, Connexus has a variety of options available. Whichever option you choose, you can count on our competitive rates and superior, personalized service.

Give us a call today to get your home equity borrowing questions answered. If you’re ready, you can apply online for a Home Equity Loan or a cash-out refi – and put your equity to work.

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