Do you want to convert the equity in your home into cash in your hand? There are a few good options. The tricky part is knowing the difference between the types of loans that are available.
Home equity loans best suit borrowers who have a substantial amount of equity available to them. You can determine the total amount of equity in your home by subtracting any and all debts secured by your house from the current fair market value of your home. The amount left over is the total equity, or value of ownership, of your house.
Usually, the amount you can borrow is determined by your credit and combined loan-to-value (CLTV) ratio. Your CLTV is your desired home equity loan amount plus your existing mortgage balance, divided by your home’s value. Your CLTV must typically be under 90 percent. When you add a second mortgage to your home, your original mortgage remains unchanged, but you will have two mortgage
payments.
The cash-out refinance loan is a loan that refinances your first mortgage into a larger mortgage which allows you to take the difference in cash.
Assuming you have an adequate amount of equity in your home, a cash-out refinance loan enables you to:
- Pay off your existing mortgage.
- Negotiate a new term, rate and repayment schedule for your consolidated loan amount.
- Obtain a new mortgage in the amount of your existing mortgage, plus the additional amount you want to borrow.
- Receive the additional amount in a lump sum.
When you elect to use a cash-out refinance loan to tap your home equity, you enter into a whole new loan agreement. This means the terms, rate and repayment plan for your new mortgage will be different.
Generally, cash-out refinance loans offer up to 30 years for repayment, and you can choose between a fixed or adjustable interest rate. You may even be able to take advantage of potential tax savings depending upon how you are using the “cash-out” portion of your loan (e.g. home improvement). Consult your tax advisor for more information.
The primary difference between a cash-out refinance loan and other home equity loan options is that a cash-out refinance loan converts one mortgage into a separate larger one. Other home equity loan options, typically, create a second mortgage on your home.
With a traditional home equity loan, you take on a second mortgage at a fixed rate with up to 30 years for repayment. One thing to consider is the fees associated with each loan. Cash-out refinancing may have fees and closing costs since you are changing your loan. Discover® Home Loans offers both home equity loan and cash-out refinance options. With Discover, there are no origination fees, application fees, or cash due at closing.
So, how do you decide?
The best way to determine which type of home equity loan option is best for you is to speak with a Discover Home Loans Personal Banker who can evaluate your individual needs. Call 1-855-361-3435 today!
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- Home Equity Loan vs Cash Out Refinance
If you’re interested in borrowing against your home’s available equity, you have choices. One option would be to refinance and get cash out. Another option would be to take out a home equity line of credit (HELOC). Here are some of the key differences between a cash-out refinance and a home equity line of credit: Cash-out
refinance pays off your existing first mortgage. This results in a new mortgage loan which may have different terms than your original loan (meaning you may have a different type of loan and/or a different interest rate as well as a longer or shorter time period for paying off your loan). It will result in a new payment amortization schedule, which shows the monthly payments you need to make in order to pay off the mortgage principal and interest by the end of the loan term. Home
equity line of credit (HELOC) is usually taken out in addition to your existing first mortgage. It is considered a second mortgage and will have its own term and repayment schedule separate from your first mortgage. However, if your house is completely paid for and you have no mortgage, some lenders allow you to open a home equity line of credit in the first lien position, meaning the HELOC
will be your first mortgage. Cash-out refinance gives you a lump sum when you close your refinance loan. The loan proceeds are first used to pay off your existing mortgage(s), including closing costs and any prepaid items (for example real estate taxes or homeowners insurance); any remaining funds are paid to you. Home equity line of credit (HELOC) lets you withdraw from your available line of credit as needed
during your draw period, typically 10 years. During this time, you’ll make monthly payments that include principal and interest. After the draw period ends, the repayment period begins: You’re no longer able to withdraw your funds and you continue repayment. You have 20 years to repay the outstanding balance. Cash-out refinance is available through either a
fixed-rate mortgage or an adjustable-rate mortgage. Your lender can provide information about fixed-rate and adjustable-rate mortgage options so you can decide which one best fits your situation. Home equity line of credit
(HELOC) has an interest rate that’s variable and changes in conjunction with an index, typically the U.S. Prime Rate as published in The Wall Street Journal. Your interest rate will increase or decrease when the index increases or decreases. Your lender may also offer you a fixed-rate loan option that would allow you to convert all or just a portion of the outstanding variable rate balance to a fixed-rate loan (Bank of America home equity lines of credit include this
fixed-rate conversion option). Cash-out refinance incurs closing costs similar to your original mortgage. Home equity line of credit (HELOC) usually has no (or relatively small) closing costs. If you think that borrowing against your available home equity could be a good financial option for you, talk
with your lender about cash-out refinancing and home equity lines of
credit. Based on your personal situation and financial needs, your lender can provide the information you need to help you choose the best option for your specific financial situation.Loan terms
How you receive your funds
Interest rates
Closing costs