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Cash-Out Refinancing Loan vs Home Mortgage Loans
- Published: May 13, 2010 by Umma Queenan Comments (0)
When you have accrued equity in your home and have need of additional cash for anything from home improvements to paying cash for a new car, you have a few options on borrowing against that equity.
Refinance Second Mortgage
Some people take out second mortgages, which is just an old school way of saying they take a home equity loan. Other people apply for home equity line of credit, and some people opt for cash-out refinancing their home altogether. There are very real differences. However, in the total cost to you so you really need to weigh them carefully.
First of all, a home equity loan, as stated above, is a second loan in addition to your first mortgage, whereas a cash-out refinancing replaces your first mortgage, and you get cash back because you are applying for more than you owe on the home.
There will be two monthly payments to keep track of contrary to one and some people find that to be a bookkeeping nightmare. The second thing to consider is that cash-out refinancing usually carries a lesser interest rate than a second mortgage.
The operative word here is ‘usually.’ In some rare cases you can get lower rates on home equity loans. And another huge point is closing costs. For the most part, you don’t pay closing costs on a second mortgage but when refinancing you are responsible for closing costs and an assortment of other fees.
You also need to consider the amortization table when considering a cash-out refinancing loan. If you are currently paying on a 20 year mortgage and opt for a new 30 year mortgage, you need to realize that for the first number of years you are not paying very much toward the principal.
It takes longer to build equity with a 30 year mortgage than with a 20 year mortgage because in the beginning it is almost all going toward interest.
It is obvious that you need to get your hands on some cash, or you wouldn’t be considering borrowing against what is probably your most valuable asset. Before you make any rush decisions make sure you fully understand which type of loan is best for you and will provide the least amount of risk down the road.
Most lenders will take the time to explain your options and help you decide which loan not only meets your current needs but will be realistic when it comes time to pay it back. After all, the lender does not want you to default on your loan because they are in business to make money.
As much as you don’t want to lose your home, they don’t want to lose money on their investment. Take all the time you need before you make a foolish decision you will regret later. No lender will fault you for being cautious.
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