Suppose you have taken a home mortgage. Now again you are burred under debts or there are certain expenses that you can not postpone. You go around looking for various options where you can get cash easily. Various lenders direct you towards either home equity loan or cash out refinance option. Now depending on your circumstances you have to decide one of them. Here are certain aspects of both the options:
BASIC DEFINITION: The value of your home is $200,000 and you owe $150,000 on the mortgage. That means you have $50,000 of equity in your home meaning a saving account with balance $50,000.
In cash-out refinancing you are allowed to access that equity. If you need $20,000, you can refinance your mortgage so that you owe $170,000 and the lender then gives you $20,000 in cash at closing. While, with a home equity loan, you keep your original mortgage and take out a second mortgage against the amount of equity you possess. But then it is the individual conditions that ultimately decide the loan type. There are many other factors that compare these two types of loans.
TIME TO GET MONEY: Suppose you are in such a situation that you feel helpless and need money as early as possible then Home equity loans are for you. They close significantly faster than a cash-out refinance - in as little as four days. However, refinancing requires a considerable amount of time to close that might be important to you.
COST EFFICIENT: Then comes the cost of loans. Generally the costs associated with home equity loans are minimal fees. With refinancing, there is an upfront fee paid to the lender at the time that you get your loan and this fee is called point. Each point equals one percent of your total loan amount. The more points you pay, the lower the interest rate you get. Along with points, a higher loan fees is also associated with refinancing.
RATE OF INTEREST: A home equity loan is a second mortgage. A second mortgage is an additional mortgage placed on property that has rights that are subordinate to first mortgage. Here you are given an amount according the equity you have in your home. In case of default, the lender who holds the second mortgage is paid only after the lender holding the first is paid. So a higher risk is involved with the lender, thus a higher rate than a cash-out refinance.
DEAL ON SITUATION: So the deal depends on your situation. If rate on your mortgage is relatively low and you go for refinancing then you lose the low rate you already have on your first mortgage. Here to enjoy the low rates of first mortgage, it may be worthwhile to get a home equity loan even at a higher rate. Often refinancing is beneficial when the term is 15 or 30 years. A home equity loan is more flexible and you can take advantage of a shorter term, greatly reducing your overall interest costs.
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