Need a considerable amount of cash but don’t want to use your savings and emergency funds? Instead of taking a personal loan or using your credit cards, you can choose to make your equity work for you.
When you wish to tap on your home equity, you have the two options to choose from. You can take a Home Equity Line Of Credit or a Cash-Out Refi. But which option is best for you?
Cash Out Refi is taking an entirely new mortgage to pay your existing mortgage and take the difference in cash. This is for homeowners who want to refinance and tap into their home equity at the same time. Cash-Out Refinance Rates Texas is slightly higher than a Rate And Term Refi.
Good Read: Defining A Rate and Term Refinance
The Perks and Drawbacks Of Cash Out Refinancing
- Receive a lump sum you can use for whatever reason you want to use it
- Easy qualification provided you have enough equity and already established a good payment history
- Lower interest rates than Home Equity Loans and HELOCs
- Allows refinancing into a shorter mortgage terms
- Closing costs higher than Home Equity Loans and HELOCs
- Longer mortgage term if you don’t apply for a shorter mortgage term
Home Equity Line Of Credit
HELOCs works like a credit card and is a second mortgage. Once approved for a HELOC, your lender will deposit the funds on your account which you can withdraw when you need them. Most HELOCs have interest-only payments which your lender will specify and adjustable rates. After the 10-year “draw” period, you will then repay your lender with the outstanding balance which typically is a 15-year repayment period.
Recommended Read: 3 things you need to know before your HELOC draw period ends
The Perks and Drawbacks Of HELOCs
- Easy to apply as long as you have enough equity and good credit history.
- The average interest rate is 5.83%
- Lower interest rate than personal loans and credit cards
- No closing costs if you have good credits
- No fees for cash draws
- Tax-deductible only when used for home improvements
- Slightly higher interest rate compared to conventional loans
- Some lenders charge annual fees even if you don’t withdraw cash yearly
- The risk for your home to be in an underwater situation
- Risk for foreclosure
When choosing between the three home equity options, there are determining factors you need to consider.
- The amount of home equity you currently have
- The amount you wish to borrow
- How long do you plan on paying off the mortgage loan
- Whether you want a fixed-rate or an adjustable-rate mortgage term
- The interest rate of your existing mortgage
- The pros and cons of each option
Both HELOCs and Cash Out Refinancing are debts. Consider the risks which can make you house poor or lose your home if you fail to repay your lender before choosing an option.
It is essential to have a good reason to tap on your equity. Don’t just cash out just because you can. Have a clear and reasonable purpose and a repayment plan in mind. Also, don’t forget to consider other alternatives and to shop for lenders to find the best one that will suit your situation.