Your home is an investment, and the equity in your home is something you can and should use to reach your financial goals. Cash-out refinances and home equity loans are both ways you can get cash from your home to do things like renovate your home, pay for tuition or consolidate debt.
Let’s look at the differences between cash-out refinances and home equity loans so you can pick the one that’s right for you.
What Is A Cash-Out Refinance?
A cash-out refinance is a new first mortgage with a loan amount that’s higher than what you owe on your house.
You might be able to do a cash-out refinance if you’ve had your loan long enough that you’ve built equity. But most homeowners find that they’re able to do a cash-out refinance when the value of their home climbs. If you suspect that your home value has risen since you bought your home, you may be able to do a cash-out refinance.
When you do a cash-out refinance, you replace your existing mortgage with a new one. The loan amount on the new mortgage is higher than the amount you currently owe. After loan funds are disbursed, you pocket the difference between your new loan amount and your current loan balance (minus the equity you’re leaving in your home and any closing costs and fees, of course).
Here’s an example: Your home is worth $200,000 and you owe $100,000 on your mortgage. To take cash out, you usually need to leave 20% equity ($40,000) in the home. If you were to refinance your home with a new loan amount of $160,000, you’d get to pocket $60,000, minus closing costs and fees.
Equity Needed For Cash-Out Refi
When you do a cash-out refinance, you usually can’t get a loan for the entire value of the home. Many loan types require that you leave some equity in the home.
To qualify for a cash-out refinance, FHA and conventional loans require that you leave 20% equity in your home. VA loans are an exception, as they allow you to get a cash-out loan for 100% of the value of the home.
Using Your Refi Funds
The cash you get from a cash-out refinance is tax-free and can be used in any way you like. Most homeowners who do https://paydayloanstennessee.com/cities/morristown/ a cash-out refinance use the money for renovations, but the money is yours to use however you see fit.
What Is A Home Equity Loan?
A home equity loan is a second loan that’s separate from your mortgage and allows you to borrow against the equity in your home.
Unlike a cash-out refinance, a home equity loan doesn’t replace the mortgage you currently have. Instead, it’s a second mortgage with a separate payment. For this reason, home equity loans tend to have higher interest rates than first mortgages. Rocket Mortgage ® doesn’t offer home equity loans at this time.
How It Works
Because a home equity loan is an entirely separate loan from your mortgage, none of the loan terms for your original mortgage will change. Once the home equity loan closes, you’ll receive a lump sum payment from your lender, which you’ll be expected to repay – usually at a fixed rate.
Restrictions On Your Loan
Lenders will rarely allow you to borrow 100% of your equity for a home equity loan. The maximum amount you can borrow varies depending on the lender, but it’s usually between 75% and 90% of the value of the home. As with a cash-out refi, the amount you can borrow will also depend on factors like your credit score, debt-to-income ratio (DTI) and loan-to-value ratio (LTV).