Your home equity can give you cash when you need it for home improvement projects, paying down debt, and other purposes. A cash-out refinance and a home equity loan are common options for tapping into that equity, but they are not right for every homeowner. Here’s the scoop on a cash out refi vs. home equity loan.

Cash Out Refi vs. Home Equity Loan: Key Differences

Both a home equity loan and cash-out refinance have you borrowing against your home’s equity. You put your home up as collateral and can avoid selling it to get the money you need. These are key similarities. Now for the differences.

•   A home equity loan is a second loan in addition to your regular mortgage loan.

•   This second loan has its own interest rates and terms different from the first loan.

•   A cash-out refinance replaces your mortgage with a new loan.

•   The refinance pays the balance on your old loan.

•   It is called a “cash out” because the new loan is for the debt remaining on the first mortgage plus the amount of money you are cashing out from the home’s equity.

Cash-Out Refinancing

Your cash-out refinance will likely come with an interest rate that differs from what you’ve had and a loan period of up to 30 years. Credit score requirements tend to be lower vs. home equity loans. That is because the financer on a home equity loan has secondary access to the home as collateral if the loan defaults. Primary access remains with the holder of the first mortgage.

Generally, you must have at least 20 percent equity or more in your home to qualify for a cash-out. This type of refinance gives you one loan, not two, to manage, so that is an advantage. Interest rates tend to be low, and you can qualify with a relatively low credit score.

On the con side, closing costs tend to be high, and the process of a new loan can take a bit of time. Your finances must be in good shape and include a low debt-to-income ratio.

Home Equity Loan

With a home equity loan, you borrow against the equity in your home. You may be able to borrow as much as 85 percent of the equity especially if you have sufficient income and a stellar credit history.

Home equity loan interest rates are lower than the rates with personal loans and credit cards. The equity interest rates tend to be fixed, and you can use the cash for practically any purpose. The monthly payments can be low if you have a longer repayment term but you’re paying on this loan in addition to your first mortgage.

If the payment comes in a lump sum, you may end up with more cash than you needed for your purposes. If this happens, you can put that extra money toward repayment.

Your credit score must be good, but the closing costs tend to be pretty low or nonexistent. A home equity loan can be a smart decision if you find one at an interest rate quite a bit lower than your mortgage rate.

Home equity loans come in two types: traditional and HELOC (home equity line of credit). A traditional loan gives you a lump sum and has you make regular, fixed payments.

HELOCs take the form of revolving lines of credit. They function similarly to credit cards in that you get replenished credit when you repay your balance. Unlike with credit cards, you could lose your house if you fail to pay on your HELOC. You are able to borrow as little or as much money as you want during the draw period. That tends to last 10 years, then the 20-year repayment period begins.

Contact Chapel Hill Realty Group today at 919-740-0884 to discuss buying a new home and the associated loans or selling your home instead of getting a cash-out refi or home equity loan.