You may be tempted to use cash equity in your home if you have owned your home for quite a while and you need cash. Below are several ways you can accomplish this; it depends on your circumstances because not all of them would be good for you. You should be able to decide which is best for you.
Between a refinancing product and a second mortgage, the major difference is that the refinancing product simply takes your existing loan and its at a lower rate. This means refinancing does not give you cash out immediately, what it does is to give you a savings over time. There are however, refinancing products that do offer a cash out feature. In those products you agree to refinance your mortgage for more than you actually owe and the difference is given to you, or cashed out. Most financial advisors ask five important questions to help their clients make the same decision. Answer these questions and see if a second mortgage or refinance is best for you.
What are your long-term goals for this home?
You should be able to convince yourself if you will be living in that house in the next 5 to 10 years. Refinancing is not going to be the answer if the answer to your question is no. interest can fluctuate and it can take at least that amount of time for you to replace the cashed out amount. In this kind of circumstance, a second mortgage may suit you better because of you sell the home you can include the second mortgage as part of the selling price. This is beneficial if you bought your home as a short-sale or you bought it below market value.
What is the interest rate currently?
Refinancing with cash out is the better choice when interest rates are low. Then you are receiving not only cash back, but you are receiving a lowered interest rate on the rest of the existing loan. Second mortgages are not beneficial because you still have the first mortgage at a higher interest rate.
Which of these financial products are you most likely to qualify for?
Cash out refinancing product is regarded as the easier financial product to qualify in general. This type of product is being favored by lenders because it places them as a primary creditor. Legally, creditors are second in line since home equity loans are basically second mortgages. This means they are more likely to scrutinize your credit and larger closing costs.
How long do you want the payment terms to be?
If you want to take as much time as possible to pay back the loan, then a home equity loan should be avoided. The longest they are offered is for 15 years, whereas cash-out refinancing is like another mortgage and can last as long as 30 years. The ideal situation is to go for the shortest term you possibly can while still having a payment each month you can afford.
What type of mortgage package do you currently have?
If your home loan is an adjustable rate, then you may benefit from the refinancing and cash out choice. This is because the interest rates are lower than they were years ago and refinancing for a fixed rate can lock in the lower rates for the life of your loan. Adjustable rates do just that, they change with the fluctuations in the market. Yes, you benefit when the rates are low, but when the rates go higher you do not.
Do you need the all at once?
A home equity line of credit (HELOC) may be a good product for you if you only need some of the equity from your home. These are a different type of home equity loan in that you are offered a line of credit against the equity in your home. It cats much like a credit card allowing you to draw out the money as you need it. When you apply for a HELOC you are approved for a certain amount to borrow and the equity in your home is used as collateral against that amount. One of the benefits of the HELOC is that there is no need for monthly payments as you would with a second mortgage or refinancing on your first mortgage. You only pay when you borrow.
Lower closing costs are available for home equity packages, some as low as a $300. Closing costs on a refinance can be as much as 1.2 percent. So, for example, if your home is appraised at $200,000, then the closing costs for a refinancing package would run approximately $2402.00. That is excluding title insurance fees.
How much time do you have?
It takes longer time than it took when you originally purchased your home when you are refinancing your home for a cash-out package. All of the credentials including personal information and income/expense figures should be provided and the average is usually 30 days for the processing. Home equity loans generally close in a week and do not require private mortgage insurance (PMI). However, unlike refinancing packages, home equity loans can often have prepayment penalties.
What’s your credit score?
Where you stand with your credit score determines your ability to engage with either of the financial products. Refinancing may not be your best option if your credit score is lower than when you first purchased your home. This is because the rates you will be offered may be higher than before.
How will you use the money?
Generally, if you can get the money out of your home and use at least a portion of it to pay off or pay down debt, you have successfully placed yourself in a win-win situation. Better still is refinancing at a lower rate, taking the cash out option and using part of it to pay down debt. Then you not only have paid down your debt but you have secured a lower rate for your first mortgage.