Joseph Stevens & Associates, Refinance vs. Home Equity Loan

If you find yourself in need of a large sum of money for some reason, you may be considering using the equity in your home by either doing a cash-out refinance or getting a home equity loan in order to gain access to the money you need.

With the federal government beginning to slowly lower interest rates, you may be wondering if you should do a cash-out refinance in order to get that lower interest rate as well as gain access to the money you have in equity. This may be a tempting situation, but a lower interest rate is only one of the things that you should take into consideration.

When you refinance your home, you are taking out an entirely new mortgage. You use this new mortgage in order to pay off your original mortgage. In the case of a cash-out refinance, you borrow more on your home than the original mortgage balance, using your equity as collateral. You can then use the money left over after the refinance is completed to do anything you’d like. You can pay off credit cards, take a vacation, make home improvements, etc.

There are drawbacks to cash-out refinancing. First of all, your mortgage balance will be bigger and will most likely be extending your loan term. Mortgages are written with either 15 year or 30 year terms. If you only have 8 years before you pay off your mortgage, refinancing to even a 15 year mortgage is nearly doubling your loan term.

There are also considerable fees involved when you refinance. It would be worth your time, and sometimes a great deal of money, to find the best deal on fees that you can find.

With a home equity loan you are using the equity in your home as collateral on a loan. Home equity loans can be for a set amount or you can get a home equity line of credit, which is an open-ended loan that can be used just as you would use a credit card, keeping in mind that when you use that line of credit, you are using the equity in your home.

Home equity loans are easier to get than a refinance, especially if you have bad credit. The interest rate is also usually lower than a refinance, and the payments sometimes qualify as being tax deductible.

No matter whether you choose a cash-out refinance or a home equity loan, be sure to do some research on the companies you are considering working with. The best way to choose a good company to work with is to ask your friends, family and coworkers for recommendations. Ask not only about the process itself, but about how they were treated by the people they were working with. Were they rushed into decisions, or did they feel that they were given good information so that they could make the final decisions themselves? Remember that you are the customer, and when you are taking a large amount of money out against your home, you shouldn’t be rushed into anything.

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