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You have two options: refinancing yourmortgageor taking out a home equity loan.
With either option, you gain access to cash backed by your home.
Understanding the differences between refinancing and home equity loans will help you choose the right option for your needs.
Also here are five myths about home equity loans.
Refinancing may lower your monthly mortgage payment or help you repay the loan faster by changing these terms.
However, you dont gain access to cash through traditional refinancing.
The only way to get some back money when refinancing is to do a cash-out refinance.
With cash-out refinancing, you substitute your original mortgage for a new one.
The new mortgage is for a higher principal amount than the outstanding balance on your original mortgage.
Home equity loans also give you access to cash based on the equity you have in your home.
The difference is that they dont replace your original mortgage or affect it in any way.
Instead, these are entirely separate loans.
First vs. Second Loan
Your mortgage is the first loan on your home.
Its the primary loan.
If you default, your first loan provider gets paid before any second loan provider, according toRocket Mortgage.
However, even after you refinance and make changes, that loan remains the primary one on your home.
On the other hand, a home equity loan is a second loan.
Interest Rates
Interest rates are a major deciding factor when evaluating any jot down of loan.
The higher the interest rates on the loan, the more that loan will cost you.
The interest rate structure also matters when setting your budget.
By contrast, most home equity loans have fixed interest rates, according toBank of America.
Closing costs are the fees and other expenses you pay your lender to process your loan.
Typically, cash-out refinancing has higher closing costs than home equity loans.
Expect to pay around2% to 5%of your loan amount in closing costs with a cash-out refinance.
Home equity loans generally have lower closing costs, as reported byCNN, though they vary by lender.
Your payment amount will change, but you only have to worry about making one monthly payment.
With a home equity loan, youre taking on a second loan on your home.
You will have two monthly loan payments unless you already paid off your primary mortgage.
Should You Choose Refinancing or a Home Equity Loan?
The right option between refinancing and a home equity loan will depend on your financial goals and preferences.
If you need cash, choose between a home equity loan or cash-out refinancing.
If youre worried about managing multiple home loans, choose refinancing over home equity loans.
That way, you only have one creditor and loan payment to manage monthly.
you’re able to also gain access to cash faster using ahome equity loancompared to a cash-out refinance.
If youre in a rush for funds, consider a home equity loan.
Compare your options with several lenders to find the best rates and loan terms.
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