How to choose between a cash refinance and a home equity loan
Do you need extra cash to help pay for home renovations, debt consolidation, or unexpected car repairs? Consider tapping into the equity in your home through a cash refinance or home equity loan.
Both loan options allow homeowners to access the equity in their home to finance a variety of things, but you should compare cash refinance and home equity loan to decide which is best for you. .
What is a home equity loan?
Home equity loans offer homeowners a way to borrow money against the amount of equity in their home. Home equity is the difference between what you owe on your mortgage and the current market value of the home. Home equity loans are also called second mortgage because it’s a separate loan payment on top of your mortgage.
Because your home also serves as collateral for the loan, non-payment may result in foreclosure. Since homeowners take on more risk with a home equity loan, lenders generally offer lower interest rates than they would for an unsecured loan.
How does a mortgage loan work?
When you take out a home equity loan, the lender will approve the loan amount based on the percentage of equity you have in your home.
The lender may allow you to borrow 80% to 85% of the value of your home, minus what you owe on the mortgage. Other requirements for a home equity loan include a good credit rating, a low debt-to-income ratio, and a stable source of income.
Once the loan is approved, your lender will provide loan information showing the amount you are borrowing, your interest rate, and any fees you need to pay. Ongoing fees in closing costs include origination fees, appraisal fees, document preparation fees, brokerage fees and application fees. Some lenders may reduce or completely eliminate these fees.
A home equity loan is paid out in a lump sum and tends to be fixed rate. You will have to repay the loan in fixed monthly installments including principal and interest. Repayment periods vary but are generally between five and thirty years.
Looking to take out a home equity loan? Find a Total Mortgage branch nearest you and speak with one of our mortgage specialists to discuss your options.
What is a cash refinance?
A cash refinance is another way to take advantage of the equity built up in your home. A cash refinance allows homeowners to take out a new mortgage, up to 80% of the value of the housefor more than is owed on the house.
This new mortgage pays off the old mortgage and the difference between the two, less closing costs, is paid in cash. This new loan is larger and may have different terms.
How does a cash refinance work?
A cash refinance is similar to a traditional refinance. You can shop around with different lenders and compare quotes, submit an application and required documents, get approved, and wait for your payment.
You will also need to meet the basic requirements for a cash refinance, but these vary by lender.
Common requirements include:
- Have a credit score of at least 620
- A debt ratio of 43% or less
- At least 20% equity in your home
As an example, let’s say you have a mortgage balance of $125,000 and the market value of your home is $300,000.
If you borrow 80% of the value of your home, you can borrow $115,000 for a loan balance of $240,000. That means you have $115,000 to use for almost anything you want, whether it’s a vacation, a wedding, or your education.
Cash Out Refinances vs. Home Equity Loan Similarities
When comparing a cash refinance and a home equity loan, both options allow homeowners to borrow money against the amount of equity in their home. Whichever option you choose, both pay out almost immediately, and you can use that money to pay for whatever you need.
A cash refinance and a home equity loan also have similar borrowing requirements. If you qualify for a home equity loan, you more than likely qualify for a cash refinance as well. However, this also varies by lender.
Both options also allow you to borrow the same amount — up to 80% of the current value of your home.
Differences Between Cash Refinance and Home Equity Loans
Cash refinance payments are often easier to manage because they replace your existing home loan. Home equity loans are another monthly loan payment along with your mortgage payment.
A cash refinance can also come with lower interest rates because it is considered senior debt, which is paid first to debt holders in the event of foreclosure or bankruptcy. However, the higher interest rate on a home equity loan may be offset by low or no closing costs.
What’s the smarter option? Cash refinance or home equity loan
If you’re torn between a cash refinance and a home equity loan, a cash refinance may make more sense if you qualify for a lower interest rate. But if you plan to take out more of the equity or can’t find a lower interest rate when refinancing, a home equity loan may be worth considering.
What you choose may also depend on the amount of equity in your home, your creditworthiness, and current offers from lenders. Both options have their own advantages and disadvantages, which is why it’s essential that homeowners do their homework to find out which option is best for their situation.
Learn more about your options with Total Mortgage
Fortunately, homeowners have options when it comes to unlocking their home’s equity. If you’re hesitating between a cash refinance and a home equity loan, Total Mortgage has you covered.
Total Mortgage has been helping homeowners and buyers get the financing they need for over 20 years. Visit one of our branches and speak to a specialist or apply online today.