Redemption against redemption of mortgage: Which to choose

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Redemption refinancing and home equity loans can help you convert your equity into cash. One replaces your existing mortgage, while the other is a second loan. (iStock)

If you are looking for a way to capitalize on your own funds, redemption refinancing and home equity loans are two of your options. Both allow you to convert equity into cash for housing improvements, debt consolidation or other expenses. However, the process for obtaining them – not to mention repaying them – is slightly different.

What is redemption refinancing?

A redemption refinance replaces your existing home loan with a new one. Your new loan will be bigger than your current one and you will receive the difference between the two balances in cash.

The requirements for a redemption refinement depend on the mortgage lender and the product of your loan, but in general, to qualify for a contract loan you will need at least:

  • Credit Score: 640 to 700
  • Debt to income ratio: 36% to 45%
  • Equity: 20%

If you want to do a cashback refill right now, Credible can help you lift weights. You can compare refinancing rates and terms from multiple lenders, all in one place. Qualify in just a few minutes and start saving interest today.

What is a home equity loan?

A home equity loan is a type of second mortgage. These are home equity loans and once you close, you will receive the rest of the loan in cash. You will then repay it (in addition to your existing mortgage) month after month until you pay it off in full.

Again, the minimum requirements for a home loan will vary depending on the lender, but here is what you can generally expect:

  • Credit Score: 620
  • Debt to income ratio: 43%
  • Equity: 15 to 20%

Learn more: Personal loan or mortgage: Which is better?

How similar are redemption refinancing and home equity loans

Both redemption refinancing and home equity loans allow you to convert your home equity into cash.

In addition, they also have the following in common:

  • You can use the revenue as you wish. There is no limit to how you can spend your money after you close the loan.
  • You get paid immediately. You will receive a one-time payment regardless of the product you choose.
  • You will pay the loan every month. In either case, you will be paying off your loan on a monthly basis, just as you would with your current mortgage.

How do redemption refinancing and home equity loans differ?

The main difference between these two options is that redemption refinancing requires only one monthly payment, while equity loans require two (your existing mortgage plus mortgage payment).

Here are some other ways in which the two products differ:

  • Interest rates: Redemption refinancing may have lower interest rates than home equity loans.
  • Closing cost: With mortgages, your lender will usually pay off many of your closing expenses. This is not the case with cash-out refinancing.
  • Impact on the initial loan: A redemption refinancing completely replaces your existing mortgage and its monthly payment. A home equity loan is an additional mortgage on top of the current loan.

Always do your homework before taking out a new loan. Credible can help you find reliable lenders for your next redemption refinancing, so you can ensure you get great value and quality services. Visit Credible today to explore your current refinancing options and find a loan that is right for you.

When to choose a redemption refinance

A redemption refinancing may be your preferred choice if:

  • You only want one monthly payment. If you can not manage a second monthly payment other than your main mortgage, a cashback refinancing may be your best bet.
  • You want a lower interest rate. Redemption refinancing generally comes with lower interest rates than mortgages. If the interest rates are lower than those of your current loan, you will save even more.
  • You are looking to consolidate your debt. Since redemption refinancing comes with low interest rates, they can be good for accumulating higher interest rate debt such as credit cards and personal loans. You will use the cash portion of your loan to repay these balances and then enjoy the much lower interest rate on your mortgage.

Consider using an online marketplace such as Credible when searching for redemption refinancing. They can help you make sure you get a great interest rate and lender for your needs.

When to Choose a Mortgage

Generally, a home equity loan will work best for you if:

  • You are satisfied with the terms of your current mortgage. If a redemption refinancing would mean receiving an interest rate much higher than your current one, a home equity loan might be a better choice.
  • Do you think that you can sell your home in the near future? Since refinancing comes with more closing costs, it may not make sense if you plan to sell soon (you may not recoup your expenses before then). In this scenario, a home equity loan may be the best.
  • You only need a small amount. Because of the higher cost of closing down on refinancing, equity loans are also better for smaller expenses – especially if you know you can repay them quickly.

An Alternative to Redemption Refinancing and Home Equity Loans

HELOCs – or housing equity credit limits – are a third way to leverage your own funds. These are similar to home equity loans in that they borrow in addition to your existing mortgage. The difference is that your money is not distributed to you in a lump sum.

In contrast, HELOCs work more like credit cards. You can raise funds from your credit line as needed, usually over a period of 10 years. Once this period is over, you will start repaying the money spent, plus interest.

A HELOC is usually best if:

  • Not sure how much cash you need or want to use for different expenses. HELOCs allow you to withdraw cash as you need it – such as a bank account or credit card.
  • You feel comfortable with a variable interest rate. Unlike refinancing and mortgages, HELOCs usually come with variable interest rates that can increase over time.
  • You do not want to start repaying the loan right away. You will not start paying the balance until the draw period ends – usually around 10 years.

If you decide to go it cheap and risk the low bandwidth you are only fooling yourself. All three options can be smart ways to access your own funds.

Continue reading: Mortgage equity loan against HELOC: Which is better?

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