When you need a chunk of cash for a project, your home may be the best source of funding. Fortunately, you do not need to sell your home to take advantage of your equity. There are two popular and practical ways to pull cash out of your home: a cash-out refinance mortgage and a home equity line of credit (HELOC).
A cash-out refinance loan replaces your existing mortgage with a new, larger loan, allowing you to take out cash in exchange for some of your existing equity. Lenders typically cap your cash-out refi at 80% of the home’s value. For example, let’s say your home is now worth $200,000, but you still owe $100,000 on your mortgage. The most cash you could take out is calculated by multiplying $200,000 by 80% to get $160,000, and then subtracting the $100,000 you still owe. Your maximum total cash-out amount would be $60,000. Whatever your cash-out amount, you can receive it as a lump sum at the closing of your loan.
Home Equity Line of Credit
A HELOC is a second mortgage loan against the value of your home. It does not replace your existing loan, meaning you will have two separate home loan payments with a HELOC. This type of loan works like a credit card in that you will be able to pull out as little or as much as you like (up to your limit) whenever you want during the 10-year draw period. At the end of those 10 years, you may not borrow anymore and are required to start repaying your HELOC loan.
Which is Best?
Determining which loan is best for your situation will depend on several things including how much equity you have in your home, how much you want to borrow, what your current mortgage interest rate is and how long you want to repay the loan.
HELOCs are usually better when you need smaller sums, while cash-out refi’s can help you pull out the most cash for large projects like major remodeling or student loans.
If your current interest rate is higher than today’s mortgage rates, a cash-out refi could help you save money by refinancing into a lower fixed-rate. If your rate is already lower than today’s rates, you may not want to give us your low rate and a HELOC would be better. The rate on a HELOC is often higher than on a cash-out refi, but since you can pay it off quicker, it might save you more in the end.
There are fees and closing costs associated with both loans and usually you can role those closing costs into the loan if you are willing to accept a slightly higher interest rate.
Whichever loan is the best fit for you, make sure you have a clear purpose for the equity you pull out of your home. If you are unable to repay your HELOC or cash-our refi, it could put your home in jeopardy. If are wise with your funding, your home can be a great source of financing for life’s big projects.
Call us at today at 808-326-2444 if you have any questions about a Cash-Out Refinance or a Home Equity Line of Credit in Hawaii for one of our mortgage professionals. All of us at Island Home Capital, Inc. are dedicated to helping you understand and make the best mortgage financing decisions for you and your family.