Cash-out refinancing is the process of converting your home equity into cash. You will have multiple options to enjoy the benefits of refinancing. Among the options, home equity loan or home equity line of credit is very popular. You can take out a new mortgage even if you have an existing home loan so it is known as a second mortgage.
Cash-out refinance vs. home equity loan
There is a similarity between cash-out refinancing and a home equity loan that allows the homeowner to take out a loan against the equity available in their home.
Cash-out refinance replaces existing mortgages and provides new and larger loans. But home equity does not replace the original mortgage but rather the second mortgage. You will get another mortgage on your home equity. If your existing mortgage interest rate is low and you do not want to replace it, then home equity loan is the best option compared to cash-out refinance.
Cash-out refinance vs HELOC
The common denominator of cash-out refinancing and HELOC is that both can take advantage of home equity if needed. Cash-out refinancing is paid to the borrower through lump sum. HELOC is a revolving line through which borrowers can withdraw money as per their need. HELOC is an old mortgage, so there is no advance or closing cost.
Cash-out refi vs personal loan
A personal loan is a specific amount that a borrower has the freedom to use. For example, the borrower will be able to combine high interest rates with cash, raise funds for home renovations or repairs, or make large purchases.
Personal loan is controlled by the borrower so its interest rate is variable. So the interest rate is determined depending on the borrower’s loan eligibility. The borrower will repay their loan by making monthly payment.
On the downside, interest rates on personal loans are higher than on home equity loans or home equity lines of credit.
Cash-out refi vs. reverse mortgage
The reverse mortgage lender pays cash on home equity as collateral to help those aged 62 and over who do not have enough cash to cover expenses.
However, it is different from other mortgages because there is no monthly payment. The repayment of this loan is required only when the borrower dies or sells the property.
If you are not thinking of transferring, and you need cash then reverse mortgage will be best for you.
When is a cash-out refinance the right choice?
Cash-out refinance will be the best choice for you when you need a larger loan to repay an existing loan. Also cash out refinance allows you to choose between adjustable interest rate and fixed interest rate mortgage.
Also if your loan term is short then your interest rate will be very low.
You will also get cash out after closing. However, it is recommended that borrowers use cash out:
- You use cash to consolidate your debt.
- Use cash to pay off your existing home loan.
- Use cash to renovate and repair your home.
- Use cash to pay for large expenses such as paying income tax bills, medical bills or college tuition fees.
Cash-out refinance is a new and long term loan, so you have to pay monthly for about 15 to 30 years.
So cash-out refinance will be best when you use it to invest in financial development.
What about debt consolidation loans?
If you have high monthly payments and want to reduce interest rates then debt consolidation will be great. But you must consider the advantages and disadvantages, because it does not make sense to everyone.
If you simply take out a loan against home equity to pay off the federal student loan, this is not the best idea. Doing so will cause you to lose the flexibility to repay the loan. Cash-out refinance is not convenient if you want to repay the auto loans. For a 30-year cash-out refinance, you need to repay the loan for up to three decades. You have been paying monthly for something that has not existed for so many years.