What is a Home Equity Line of Credit (HELOC)?

Alternatives to Cash-Out Refinance

If cash-out refinance is not right for your current situation, there are other options. Whether tapping into your home equity using a second mortgage or securing a personal loan, each option comes with its own set of advantages and disadvantages.

What is a Home Equity Loan?

Like cash-out refinance, home equity loans provide a one-time lump sum of money by using the equity accumulated in your home. However, unlike cash-out refinance, home equity loans create another lien on your home. This is why they are sometimes called a second mortgage. Monthly repayments must be made in addition to payments on your original mortgage, meaning that a default on a home equity loan could lead to foreclosure.

Another type of second mortgage, a HELOC works similarly to a home equity loan in that it provides money by using the equity amassed in your home.

However, unlike the former’s lump-sum, HELOCs open a revolving line of credit. The lender determines the maximum credit line and you can borrow whatever you need during certain periods, which you can then repay and use again.

Banfield explains that the downside to home equity loans and HELOCs is that homeowners will usually pay a higher interest rate than with a cash-out refi, and they will take on an additional monthly payment. A cash-out refinance may also be an opportunity to lock in more favorable mortgage terms.

What is a Reverse Mortgage?

Available for homeowners who are 62-years or older, a reverse mortgage also uses the equity to pay cash to the homeowner. However, because of government-set parameters, a reverse mortgage does not require the homeowner to pay back the amount before payday loans Middleton Ohio any specific period.

Nevertheless, you’re giving back your stake in the home to the lender in return for cash, and any heirs to the property will need to pay the loan back if they want to keep the home.

Should I Consider a Personal Loan?

Again, it boils down to your circumstances. Homeowners who don’t yet have enough equity in their home to apply for a cash-out refi or second mortgage might not have another alternative.

Personal loans usually come with higher interest rates than mortgages because they do not use collateral as a guarantee of payment.

FAQs About Mortgage Refinancing

Home equity is the amount of your home you actually own. That is the difference between the amount you still owe on your mortgage and the home’s current market value.

For example, if your home is currently worth $300,000 and you owe $100,000 on your mortgage, your equity is $200,000 or about 67%.

You slowly increase your equity as you make monthly mortgage payments or if the value of the home increases. A decrease in home value can mean owing more than the home is worth, which is known as negative equity.

In mortgage refinancing, the break-even point is the time it takes you to recoup the costs associated with the refinance (including closing costs and other fees) with the monthly savings you receive from it.

Although there is no defined break-even period goal, as it will depend entirely on each individual situation, the less time it takes to reach it the better. If you expect to sell before your break-even point is reached, it may not make sense to refinance.

DTI is your combined monthly debt payments (including your new mortgage) divided by your monthly gross income, expressed as a percentage. It lets lenders know your repayment capabilities and, therefore, whether they can take the risk in offering you a mortgage loan.