If you are a homeowner who is faced with a situation that requires you to raise cash for an emergency, you may be wondering whether you would be better off with a home equity loan or a cash out refinance. What is best for you will ultimately depend on your unique situation.
Who is better off with a Home Equity Loan?
There are some consumers who would be financially better off taking a home equity loan or a home equity line of credit versus refinancing their mortgage in a cash out settlement.
Home equity loans of all types have the advantage of low to no closing costs, especially if you take advantage of one of the many advertised deals that abound. In a financial emergency, every bit of savings can help and choosing a home equity loan can keep initial costs to a minimum.
The best rates overall are usually found on smaller, short term home equity loans. If you do not need to borrow an especially large amount of money and the funds that you need are covered by the equity in your home you may be an ideal candidate for a home equity loan.
Another important point to consider is the interest rate on your first mortgage. If you were one of the lucky homebuyers who took advantage of recent rock bottom mortgage rates, it would be silly to refinance your mortgage and get stuck paying a higher interest rate.
Who is Better off With a Mortgage Refinance?
A mortgage refinance is another option to get cash in an emergency situation by using your home as collateral. You can choose to take what is called a "cash out refinance" loan on your home. What happens in a cash out refi is exactly what it sounds like, you refinance your mortgage and take cash out for emergencies or any other purpose. In a cash out refinance loan, you can only get as much cash as you have equity in your home.
This is also the case with any loan, equity or refinance. The benefits to a cash out refi is that if you are paying a higher rate of interest than you can get now, you can actually save money on your monthly payments while getting the cash you need now. Because the cash you take out is rolled back in to the loan over the full 15 or 30 years, the differences in your monthly payment is negligible and in some cases still lower than where you started.
A cash out refinance loan is ideal for a homeowner who has a mortgage at a higher rate than what they could currently get if they were to refinance. The downside to a refinance is that you start all over again as if you had just taken the mortgage. Also, refinance loans often have a significant amount of closing costs involved. Still, if you are in need of cash and are in a position to lower your interest rate at the same time, a cash out refi may be the best choice for you.
By reviewing your current mortgage rates and equity figures, you should be able to see which option would be most cost effective in your situation. When in doubt, run the numbers and compare the scenarios on paper. This due diligence can save you money in the long run and prevent you from making a bad decision over your mortgage options.
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