If you’re looking to extract value from your home to pay for new additions or to consolidate debt, you generally have two options: cash-out refinancing or a home equity loan. Our team at Mortgages Diversified can help you to understand the full range of benefits each option offers and decide which is right for you.
What is a home equity loan?
A home equity loan is a financial product best suited to those with significant equity in their property. You can determine your equity level by subtracting all home debts to the fair market value of your property. The loan process involves securing your loan against the value of your equity in the property. Most lenders will allow you to borrow up to 90% of your equity. When the home equity loan process is completed, you have two mortgage loans. The original, which remains unchanged and the second loan, which is based on the home equity loan rate agreed with your lender.
What is a cash-out refinancing?
A cash-out refinancing does not require you to take out a new second loan. The product allows you to refinance your current mortgage loan based on your home equity. The cash-out refinancing allows you to extract value from your property while negotiating a new term, rate, and repayment schedule. You will receive the borrowed funds in a lump sum from the lender. While every other home equity loan option creates a second mortgage, a cash-out refinancing is a great option for simply extending your current mortgage under new terms.
Important elements to consider
When making your decision whether to choose a home equity loan or cash-out refinancing, there are generally three elements to consider:
- The size of the loan
Generally, the higher the amount you are looking to loan, the more cash-out refinancing makes sense. This is because the cash-out refinancing process involves several additional charges, such as escrow and title charges, which will be a smaller percentage with a larger amount.
- Your current home equity
Those with little equity might not have the option of either of these loans. With more equity comes a greater range of financing options.
- Current interest rates
With rates potentially rising in the long-term, analyze the value of variable versus fixed rates in selecting your financing product.
The Mortgages Diversified Team at Summit Mortgage Corporation
To learn more about the options available for your lending requirements, please call our team now for a consultation.