Home Equity Loans vs. Cash-Out Refinancing: What’s the Difference?

The increase in home values ​​since 2020 has left many Americans feeling a bit new equity. If you want to tap into yourself for a big expense but don’t want to sell your home, then Home equity loan or cash-out refinance may be able to help. It helps to know the difference between the two to determine which one is best for you.

While both options offer one-month secured loans, they come with different costs, terms, payment structures and lien locations. Below, we break down what you need to know to make an informed decision You can now easily explore your home equity loan options and eligibility.

What is a home equity loan?

A Home equity loan This is a type of loan that allows you to borrow against a portion of the equity built up in your home — often Up to 80% of your property value. After approval, you will get a lump sum loan amount to be repaid through monthly installments over a fixed period. Conditions Usually from five to 30 years.

If you have an existing mortgage, the home equity loan will be separate, resulting in a second loan payment each month. The lender will retain a second lien on your home until the loan is paid in full. Learn more here now.

What is a cash-out refinance?

A Cash-out refinancing Refers to the process of replacing your existing mortgage with a new one large enough to pay off the principal balance and leave money remaining. Surplus is made available to you through a single payment. As with a home equity loan, you can often borrow up to 80% of the value of your home, although the loan-to-value limit can vary by lender.

If you go this route, your original loan will be paid off and closed and you’ll start making payments on the new loan over a fixed term (often up to 30 years). The new loan will become your primary mortgage, meaning it’s secured by your home with a first-lien position. Learn more about your refinancing options here now.

How are home equity loans and cash-out refinancing similar?

Home equity loans and cash-out refinances are both mortgages — loans secured by the borrower’s residential property. In either case, you:

• Borrowing based on the equity you’ve built up
• Receive a lump sum payment
• Repaying it (with interest) over a fixed period through fixed payments
• is paying Closing costs 2% to 5%

The two loan types often have similar loan-to-value ranges and ELIGIBILITY.

How are home equity loans and cash-out refinancing different?

With a home equity loan, also called a second mortgage, you’re getting a new loan in addition to your primary mortgage. As a result, you will have two mortgage payments and two liens on the property. If you default, your primary mortgage lender will be paid from the proceeds of the sale of your home before the home equity mortgage lender. As a result, home equity loans usually come with higher interest rates.

When you opt for one Cash-out refinancing, your existing mortgage is replaced, so you only have one loan, one lender, and one mortgage payment. In this case, the lender places a first lien on your property so you often benefit from a lower interest rate.

Furthermore, while closing costs for both types of loans range from 2% to 5%, cash-out refinance loans are usually larger so they come with more expensive fees.

Is a home equity loan or cash-out refinance right for you?

The right fit will depend on your situation, economic environment and your preferences.

“If interest rates have dropped significantly since taking out the original mortgage, a cash-out refinance can allow homeowners to secure a lower interest rate on the entire mortgage amount, including additional cash withdrawals,” said Michael Hammelberger, CEO and a Bottom Certified Financial Advisor working for Line Group.

“A cash-out refinance also allows homeowners to consolidate their existing mortgage and additional funds into a single loan, simplifying their monthly payments,” he adds.

On the other hand, Hammelberger warns that there are drawbacks to cash-out refinancing. Home equity loans often offer lower closing costs, lower fees and shorter terms, which can outweigh the benefits of cash-out refinancing.

“A financial advisor or mortgage professional can help homeowners evaluate their options, weigh the costs and benefits, and make an informed decision based on their specific situation,” says Hammelberger.

Learn more about your home equity loan options here now.