Need extra money to pay for home improvements, debt consolidation or unexpected car repairs? Consider using your home equity through a cash refinancing or equity loan.
Both loan options allow homeowners to access their home equity to finance a variety of things, but you should compare redemption refinancing with equity loan to decide what is best for you.
What is a home equity loan?
Mortgage lending offers homeowners a way to borrow money for the amount of equity in their homes. Equity is the difference between what you owe your mortgage and the current market value of your home. Also called home equity loans second mortgages because they are a separate loan payment in addition to your mortgage.
Because your home also serves as collateral for the loan, inability to make payments could lead to foreclosure. As homeowners take more risk with a home equity loan, lenders usually offer lower interest rates than they would for an unsecured loan.
How does a home equity loan work?
When you take out a home equity loan, the lender will approve the amount of the loan based on the percentage of equity you have in your home.
The lender can allow you to borrow 80% to 85% of the value of your home, minus what you owe on the mortgage. Other requirements for a home equity loan include a good credit score, a low debt-to-income ratio and a stable source of income.
Once approved for the loan, your lender will provide loan notifications stating the amount you are borrowing, the interest rate and any commissions you have to pay. Common charges for closing costs include origin fee, appraisal fee, document preparation fee, broker fee and application fee. Some lenders may reduce or waive these charges altogether.
A mortgage share loan is paid in a lump sum and tends to be at a fixed interest rate. You will need to repay the loan in fixed monthly installments that include principal and interest. Repayment periods vary but are usually between five and thirty years.
Do you want to get a home equity loan? Find a Total Mortgage branch closest to you and talk to one of our mortgage experts to discuss your options.
What is Cash Out Refinancing?
Cash refinancing is another way to take advantage of the accumulated equity in your home. Cash refinancing allows homeowners to take out a new mortgage, up to 80% of the value of the housefor more than they owe at home.
This new mortgage repays the old mortgage and the difference between the two, minus the closing costs, is paid in cash. This new loan is bigger and may come in different terms.
How does a redemption refinance work?
Cash refinancing is similar to a traditional refinancing. You can shop different lenders and compare offers, submit an application and required documents, get approval and wait for your payment.
You will also need to meet the basic requirements for cash refinancing, but these will vary depending on the lender.
Common requirements include:
- You have a credit score of at least 620
- Debt to income ratio 43% or less
- At least 20% share capital in your home
For example, suppose you have a mortgage balance of $ 125,000 and the market value of your home is $ 300,000.
If you borrow 80% of the value of your home, you will be able to get $ 115,000 for a $ 240,000 loan balance. That means you have $ 115,000 to use for almost anything you want, whether it’s for a vacation, a wedding or your education.
Cash Out Refinance vs
When comparing cash refinancing with a home equity loan, both options allow homeowners to borrow money for the amount of equity in their home. Whichever option you choose, you both pay almost immediately and you can use that money to pay for whatever you need.
A redemption refinancing loan and a home equity loan also have similar borrowing requirements. If you qualify for a home equity loan, you are more than likely eligible for cash refinancing. However, this also varies depending on the lender.
Both options also allow you to borrow the same amount – up to 80% of the current value of your home.
Cash Out Refinance vs Home Equity Loan loan differences
Redemption refinancing payments are often easier to manage because they replace your existing mortgage. Mortgages are another monthly loan payment along with the payment of your mortgage.
Cash refinancing can also be accompanied by lower interest rates, as they are considered a first pledge debt, which is paid first to the debt holders in the event of foreclosure or bankruptcy. However, a higher interest rate on a home equity loan can be offset by low or no closing costs.
What is the smartest option? Redemption by redemption or home equity loan
If you decide to go it cheap and risk the low bandwidth you are only fooling yourself. But if you are planning to raise more equity or you can not find a lower refinancing rate, a equity loan might be worth considering.
What you choose may also depend on the amount of equity you have created in your home, your creditworthiness and your current lender offers. Both options have their advantages and disadvantages, so it is important for homeowners to do their homework to find out which option is best for their situation.
Learn more about your options with a total mortgage
Fortunately, homeowners have options when it comes to unlocking their own funds. If you decide to go it cheap and risk the low bandwidth you are only fooling yourself.
Total Mortgage helps homeowners and buyers get the financing they need for more than 20 years. Visit one of our branches and talk to a specialist or apply online today.