What Is A Refinance
Refinancing entails getting a mortgage loan that replaces your current mortgage loan. The new loan would come with new terms, like a different interest rate and payback period .
Homeowners may refinance their homes once they have built up some equity. One option when refinancing is to remove some of your equity and turn it into cash in your pocket. This is a cash-out refinance. A homeowner who is eligible for a government-backed mortgage program like the FHA or VA may be able to obtain a refinance loan through these programs.
At closing, the title company will use the funds from the new loan to pay off the balance of the current mortgage. If the new loan is larger than the balance of the existing mortgage, the homeowner can keep the remainder of the loan.
Suppose the homeowner described above decides to take out a $400,000 refinance loan. Most of the loan funds will go toward paying off the homeowners current mortgage balance of $350,000. The homeowner may pocket most of the remaining $50,000, after closing costs, to use for whatever purpose they want. Now that the previous mortgage is paid off, their only obligation is to make payments on the refinance loan.
Read more about the capabilities of refinancing your home.
Pay For Home Improvements
Who doesnt want a new kitchen, a new bathroom or an additional room? People often justify home-improvement borrowing by saying it will increase their propertys value.
Remodeling.coms 2020 Cost vs. Value report may disabuse you of that notion: It shows that home upgrades do not offer any return on your investment they actually lose money, though certain markets and projects offer exceptions. Make your home nicer because you want tonot because it will pay for itself.
This use of mortgage debt is tax deductible if you itemize, but most people dont.
Which One Is Easier To Qualify For
The major banks are cautious about approving cash-out refinancing when they have little evidence of what you are going to do with the money. This is because a few borrowers use the funds for a purpose other than what they tell the bank, which can result in them defaulting on their loan due to missed repayments. Most lenders restrict the amount of money you can release, to as little as $10,000. But not every lender has such a policy.
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How A Heloc Works
A home equity line of credit is another type of second mortgage. This loan generally makes sense if you want to borrow smaller sums over a longer period, or if you want money available to borrow just in case.
With a HELOC, youre given a line of credit with a maximum borrowing limit, similar to a credit card. You can withdraw what you need during the loans draw period , and youll only pay interest on what you borrow.
In many cases, lenders will only require you to pay interest during the draw period, however, youre free to make principal payments during this time as well.
Here are some of the main benefits of a HELOC:
- Ability to make withdrawals as needed during the draw period
- Interest-only payments often allowed during draw period
- Only pay interest on what you borrow
Once the draw period ends, you cannot make any additional withdrawals and must repay both interest and principal. You might have a draw period of 10 years followed by a repayment period of 20 years, but shorter terms are available, too.
Unlike home equity loans, HELOCs generally have variable interest rates. However, some lenders might offer fixed-rate HELOCs.
Home Equity Loan Vs Mortgage Loan Differences
- Loan amount: A significant difference between mortgage and home loan is that for a home loan mortgage, the loan amount is derived from the current market value of the commercial or residential property. The borrower can get up to 80% of the property value or up to Rs 1 crore. The property will not have any existing loans and liabilities against it.The loan amount that the borrower can get against their home in an equity loan is derived from the difference between the propertys current market value and the remaining mortgage balance owed by the borrower. The difference usually comes up to about 5070% of the property value.
- Type of interest: Lenders often offer a floating interest rate when a home loan mortgage is concerned. Whereas with an equity loan, lenders usually offer fixed interest rates.
- Processing times: The processing time for a house mortgage loan is usually around ten days, subject to documentation clearance and verification processes. A home equity loan usually takes two to four weeks to process, subject to documentation clearance and verification processes.
- Prepayment fees:There are no prepayment fees if the house mortgage loan has a floating interest rate.
Prepayment charges will differ from one lender to another when it comes to a home equity loan, which usually has fixed interest rates.
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Equity Loan Vs Refinance: How Do I Decide Which Is Right For Me
When deciding whether to choose between a home equity loan or refinancing, its important to consider what you need the money for and what your current mortgage interest rate is.
If your current interest rate is very high and you have good credit, you may want to explore refinancing to save more money over time. If your credit isnt high enough to refinance, you can still get the cash you need through a lump-sum loan.
Furthermore, if youre not sure precisely how much you need, you may consider opening up a HELOC to borrow as you need it. This is great for long-term home renovations and repairs, but not ideal if youre planning to sell your home right after its fixed-up.
Getting The Best Available Loan
Its high time to build equity. You can do it with the help of Reach Home Loans. We are one of the top mortgage companies in the Sunshine State. Our company has been in the business for decades. Our years of experience mean we know what to do to get you the loan you need. We offer conventional loans, VA loans, and FHA loans. You can call us at 954-703-1465 or send us a message here. We are available for your needs 24/7.
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What Is The Difference Between Home Equity Loan Vs Mortgage Loan
Sometimes, a person faces a financial crisis for which they need to borrow a high sum of money. In these cases, lenders are willing to provide a high loan if the person provides collateral, such as a property they own. There are two types of loans against property available here: home equity and house mortgage loan. The borrower can get a home equity loan against the equity they hold in a property. They can also get a house mortgage loan against fully constructed properties they fully own. Here is a guide on the two loan types.
When Should I Choose A Cash
- You need stability in your budget: With a HELOC, your monthly payments can vary substantially, particularly when you transition from making the interest-only payments during the draw period to the repayment period, when you must pay back the principal as well. A cash-out refinance might help you avoid this challenge.
- You want to improve your interest rate: If you initiated your mortgage at a time when interest rates were higher and rates have since declined, a cash-out refinance could allow you to obtain new, more favorable terms.
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What Is Home Equity
Home equity is the difference between the value of your home and how much you owe on your mortgage.
For example, if your home is worth $250,000 and you owe $150,000 on your mortgage, you have $100,000 in home equity.
Your home equity goes up in two ways:
- as you pay down your mortgage
- if the value of your home increases
Be aware that you could lose your home if youre unable to repay a home equity loan.
Home Equity Loan Vs Refinancing Cash
Whether it makes sense to choose a home equity loan vs. refinance loan can depend on your goals and what you need the money for. So what are the advantages of home equity loan vs. refinancing?
In a nutshell, getting a home equity loan could be a good fit if youre comfortable with having two mortgage payments and you want to borrow at a fixed interest rate. Its also possible that you could take out more of your homes equity with a home equity loan vs. refinancing cash out.
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Home Equity Line Of Credit Vs Refi: Which Makes More Sense In This Economy
Tapping your home’s equity with a HELOC can be a cost-effective option in today’s housing market. Here’s what you need to know.
Homeownership has its benefits. A major one is the ability to grow your wealth by building equity, which is the difference between the balance of your mortgage and your home’s appraised value.
One way to access your home’s equity is to sell it. Sure, you’ll have cash in your pocket, but you’ll also have the dubious — and stressful — task of finding another place to live not an ideal situation to be in amid today’s rising home values. If you’re not looking to move, you can tap your home’s equity through either a cash-out refinance, a reverse mortgage , a home equity loan or a home equity line of credit, or HELOC.
With 30-year fixed mortgage rates around 5%, replacing your current mortgage with a new one through a cash-out refinance may not be the most advantageous option, and a reverse mortgage doesn’t apply unless you’re age 62 or older. That makes home equity loans, specifically HELOCs, a more popular option in today’s economy. Here’s what you need to know about HELOCs.
Home Equity Loan Vs Mortgage Loan Definitions
A house mortgage loan, also known as a home loan mortgage, is a loan that banks and lending institutions offer against commercial or residential properties that a borrower wholly owns.
So, what is home equity loan? Also called an equity loan or a second mortgage loan, a home equity loan is provided by lenders against the equity of a borrowers home. The house must be constructed entirely and have clear title deeds.
Going by the term, when you think of the question of what is home equity loan is, the answer indicates that it is a loan taken explicitly against a homes equity. However, the loan can be taken against property that is residential or non-residential.
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When Is A Cash
Cash-out refinancing is suitable for borrowers looking to use the cash-out sum for paying off personal and credit-card debts. We recommend people make a cash-out only if they can use the money in a disciplined manner.
If you are thinking about spending the cash-out amount on lifestyle expenses and have no concrete plan to afford repayments, then cash-out refinancing is not for you.
Use our to find out where you stand.
Note: You should refinance only if you plan on staying in the home for at least 18 months, else the closing costs will take up a large portion of your equity. Staying in the home longer than that can make up what you lose on closing costs in lower repayments, assuming you negotiated a better interest rate.
When Do You Have To Pay It Back
Cash-out refis can extend to 30 years, just like a primary mortgage. When refinancing to get cash out, you can choose to keep your original term, go to a shorter term or extend the length of your term. Your monthly payments may increase with a cash-out refinance, especially if the new loan has a shorter term or is for a much larger amount than your original mortgage.
With a HELOC, payments aren’t typically required during the draw period. The length of the draw period can vary, but 10 years is pretty common. During the draw period, you might have the option to make monthly payments against the interest. Once you’re in the repayment period of a HELOC, you’ll make payments against both the principal and the interest. The repayment period on a HELOC is longer than the draw period 20 years is fairly standard .
Home equity loans are generally shorter, with repayment periods no longer than 15 years. Keeping the term short while making sure you can afford the payments lowers the total amount of interest you’ll pay.
» MORE: See current HELOC rates
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Home Equity Loans & Home Equity Line Of Credit
What is a home equity loan and line of credit?
A home equity loan or home equity line of credit are mortgages that enable you to borrow against the value of your home, minus your remaining mortgage, by using your home as collateral. If youre approved for a home equity mortgage, the lender will determine how much money you can borrow based on your homes value and any debts against you. The bank will present that amount to you in a lump sum, which you must then repay at a fixed rate over a set number of years if you have a home equity loan or at an adjustable rate and set term if you have a home equity line of credit. If you default on your home equity mortgage, the lender reserves the right to take possession of your home.
Requirements to qualify for a home equity mortgage vary from lender to lender, but typically include the following:
- A credit score of 620 or higher
- More than 20 percent equity/a loan-to-value ratio of 80 percent or below, as determined by an appraiser
- A low debt-to-income ratio
- Stable credit and bill repayment history
- Income and asset verification documentation
What are the advantages of a home equity mortgage?
And the disadvantages?
What Are The Features And Benefits Of A Home Equity Loan
- A home equity loan may be a good choice for borrowers with lower credit scores.
- Since the loan amount is based on the property value, borrowers can get higher loan amounts from a home equity loan than from a personal loan.
- The interest rates offered by lenders for home equity loans are lower than those for personal loans since equity loans have collateral.
- The repayment tenure is usually up to 15 years, and there is flexibility given for the repayment.
- The fixed interest rate also allows borrowers to procure higher loan amounts and repay the same over a predefined tenure.
- Unlike a home loan, there is no need to use the funds for any restricted purpose. Borrowers can utilize the loan amount for any purpose they wish.
- Borrowers can avail of either a fixed-rate interest equity loan or home equity line of credit , where they can withdraw funds at their convenience via a checkbook or credit card.
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Home Equity Loans Vs Helocs
A home equity loan and a home equity line of credit, or HELOC, are both types of second mortgageways to leverage the wealth youve built in your home to get access to cash.
In both cases, you need an appraisal of your home to determine its value, and a lender will evaluate your credit score and other financials to decide how much you can get.
Youll need to repay what you borrow from either a home equity loan or a HELOC, but the timing and size of the loan and repayments differ. A HELOC is similar to a credit card, Heck says. You have access to cash for a preset amount of time known as the draw period, which is usually 10 years. Youll have to make interest-only payments during that time, and rates are variable. When the draw period is up , you start repaying what you borrowed, with interest. The repayment period for a home equity loan begins immediately after you get the cash.
While the mortgage you get when you first buy a house can include exorbitant closing costs, home equity loans and Helocs typically dont include those fees. If theyre not free, they are usually fairly inexpensive, says Alexander.
Another tool for tapping home equity is a cash-out refinance. This method requires taking out a new loan thats larger than your existing mortgage balance so that you can pay off the debt and pocket some cash. Your new mortgage will have a lower interest rate, too, which may lower your monthly payment.
How To Qualify For A Home Equity Loan
You need an appraisal to qualify for a home equity loan, but you dont have to go out and spend $500 to $750 hiring an appraiser yourself, says Robert Heck, vice president of mortgage at Morty, an online mortgage broker. Most lenders will want to do an appraisal in-house, he says, so that step will probably come after youve selected a lender.
If you want an estimate of how much your house is worth before applying for a home equity loan, use free online tools from real estate marketplaces like Zillow or Redfin, or check if your primary mortgage lender can help. Some lenders actually have these systems available to consumers early on in the process, Heck says. And they may not charge for it.
Say your current home value is $500,000 and your remaining mortgage balance is $200,000. The portion of the home you outright ownyour equityis $300,000. Put another way, you have 60% equity the other 40% is owned by the financial firm that holds your mortgage.
Lenders typically require home equity loan borrowers to maintain at least 20% equity. That means you can borrow up to 80% of your current home value between your existing mortgage balance and your new loan. Heres the formula, using the numbers from the example above:
- $500,000 x 0.80 = $400,000
- $400,000 $200,000 = $200,000
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