Need of money could pop up anytime and for any reason you might find yourself in an urgent need of money. These reasons can be home improvement, any type of investment, pending medical bills, or fee of your children’s higher education. Sometimes extra money is required to mount debts.
Choices Available to Homeowners
You can easily take out home equity loans by a number of ways. For instance, you can use home equity lines of credit, reverse mortgages etc. You can also take out a home equity loan. Many homeowners decide to cash out their refinance options. Homeowners have a variety of choices to choose from.
Difference between Home Equity Loan & Cash Out Refinance
If you know the difference between home equity loan and cash out refinance then you can easily decide which option is better for you.
Home Equity loans
It is a type of loan that helps a homeowner when he/she decides to use their home as collateral to take out loan from any lender. In simpler words, a home equity loan is an independent loan on the top of your very first home loan. This loan can be beneficial when you seek to build a new line of credit, or also in the case when you need a moderate amount of cash that you think you can repay easily. You can se this type of loan if you need home renovation, to fulfill the tuition cost, or you can use this loan for dent consolidation.
Advantages of Home Equity Loans
This loan comes with many advantages for homeowners. First advantage is their fair and decent annual percentage rate. Second advantage is that if you have bad credit score then you are still be able to qualify for this loan. Moreover, you can easily take out a substantial amount of loan with this loan along with tax deductible payments through the year.
Disadvantages of Home Equity loan
The biggest disadvantage of this loan outweighs its advantages. This disadvantage is that of you become default on this loan then you will have to lose your home which you have put as collateral. Another disadvantage of this loan that the payments which you got to pay for this loan are other than your regular mortgage payments. In that case, you will have to pay off higher monthly payments. IF you cannot afford to pay its payments, then stay away from it for your betterment.
Cash Out Refinance
It is originally a second mortgage on your house. Cash out refinance replaces your first mortgage loan with a new loan. For example, if you owe an amount of $100,000 on a house that is worth $250,000 and you need an amount of $25,000 to pay off your medical bills. In such a case, you can refinance your mortgage loan for $125,000, normally ending up gaining affordable rate on the amount $100,000 that you still owe on your home and you can get $25,000 difference in your pocket.
Advantages & Disadvantages of Cash Out Refinance
Cashing out refinance is actually an easy way to get your primary mortgage replaced. This means that you will have to pay off the closing costs of several thousand dollars with this loan. ON the other hand, you don’t have to pay the closing cost of home equity loan. Advantage of this loan is that, it has lower interest rates that are lower than the rates on home equity loan. It is not worth refinancing when your home equity loan is worth more than the remainder on your mortgage.
What loan you should take out depends on your financial situation and affordability. Before taking any of these loans, review your financial situation and select the best for you.