There’s more than one way to leverage the value of your home, and some key differences too.
Your house is more than just shelter or a place to call home – it’s also usually your biggest financial asset. Your house obviously has value, and that value can be leveraged to help you reach your financial goals. The part that can be confusing is that there are multiple ways to leverage the equity of your home, and they can seem fairly similar at a first glance. The two most popular ways to turn your homes equity into cash are either through a cash-out refinance, or a home equity loan, and while they technically get you to the same end-result – turning part of your home’s equity into funds – the difference between them are very important to understand.
What a Refinance Does for You
A refinance is a fairly simple process: you replace your current mortgage with a different, usually more favorable in some way, loan. A cash-out refinance replaces your mortgage with a larger loan, meaning that you also receive a lump-sum payment at the time of funding. A refinance may not be an attractive option, however, if your current mortgage has especially beneficial terms – such as a low interest rate, more favorable prepayment privileges, and so on. But if interest rates are still relatively low, and your current mortgage is fairly standard, a cash-out refinance can be an excellent financial tool.
What a Home Equity Loan Accomplishes
A home equity loan is very similar to a cash-out refinance. A lender gives you a portion of your home’s value as a lump-sum payment, and you pay the loan off over time. The main difference between the two is that a home equity loan is an additional loan on your home, and usually positioned behind your primary mortgage. Because of this, home equity loans tend to have higher interest rates than cash-out refinances (though not always). They can be the right solution, however, if you have a very favorable existing mortgage that you don’t want to get rid of with a cash-out refinance.
A home equity loan and a refinance might get you to the same end result – money in your pocket and a larger loan on your home – but there are some important distinctions between the two. If you’re trying to figure out how you can benefit from one of these financial tools, reach out to us and we’ll help you through the entire process!