High-interest debt is the worst and can add up fast. In fact, one in five Americans allocate anywhere from 50%-100% of their income towards debt repayment, according to Northwestern Mutual's 2018 Planning and Progress Study. For the millions of homeowners still paying off student loans, credit cards, auto loans and other non-cancelable debts, a cash-out refinance or home equity loan are both strong options that will get you on the path to financial freedom.
What is a cash-out refinance?
A cash-out refinance allows you to convert the equity you've built in your home into cash. This type of loan involves taking out a new mortgage to pay off your existing loan balance, plus additional funds you can use at your discretion. Your new mortgage balance will be higher, and consequently, so will your loan-to-value ratio (LTV). Although taking on a higher loan balance to get out of debt may sound counter intuitive, the freed up cash can give you the peace of mind knowing you’re able to eliminate higher interest debt obligations.
What is a Home Equity Loan?
With a home equity loan, your monthly mortgage payment gets split up for principal, interest and, depending on your loan structure, taxes and insurance (PITI). The amount that goes toward the principal balance, coupled with the rise in home values in your area, increases the equity in your home. You can take a home equity loan out on that amount, providing you maintain proper loan-to-value limits. The advantage is you can access cash for a variety of purposes without changing the terms of your first mortgage. That’s great if you like your loan. However, if you are in a position where you can improve the terms of your first mortgage, you might want to opt for a cash-out refinance.
Why Choose a Cash Out Refinance?
Many people use a cash-out refinance to eliminate multiple revolving balances and installment loans each month. Consolidating debt under a new mortgage can save you money by delivering an overall reduced interest rate for debt, and enable you to streamline your monthly debts into one low payment. Interest rates on mortgages are typically much lower compared to personal loans, and the good news for borrowers today is that the market is experiencing some of the lowest rates in decades.
Why Choose a Home Equity Loan?
A standard home equity loan is also known as a ‘second mortgage.’ This loan option can get you an affordable rate, but it will most likely be higher than that of your first mortgage and you will be making payments on two loans each month. If your credit could use some work, it might be easier to qualify for this type of loan.
How Much Money Can I Take Out?
Cash-out refinances and home equity loans usually require a new home appraisal to ensure the home’s value is higher than the amount of the first note. Different loan types allow homeowners to take out maximum percentages of equity; however, if your remaining equity stake is less than 20%, the lender will usually require you to pay private mortgage insurance on top of your monthly mortgage payment:
- Conventional Loans: up to 80%
- FHA Loans: up to 85%
- VA Loans: up to 100%
Things to Know:
- Refinancing a regular mortgage means you will pay closing costs, although they can often be rolled into the loan.
- Cash out refinancing replaces your first mortgage with a new first mortgage, which will carry different terms.
- Home equity loans are second mortgages that must be paid concurrently or consecutively with the first one; check with your lender – this can be the best option if you have an excellent rate on your first and you don’t want to lose that in a refinance.
- Creating an option-assessment list with your licensed lending officer is recommended so you can get all the information as basic dollar amounts and see how it will fit into your budget.
Want to find out if a cash-out refinance or home equity loan is right for you? Learn more about locking in your financial future from a loanDepot licensed loan officer. Contact us today!