You may not have known, but your home can be a handy source of cash. You can use this cash during emergencies, for repairs, or upgrades. This cash can be yours via mortgage refinancing or through a home equity loan.
Refinancing pays off your old mortgage and trades it for a new one at better terms. A home equity loan gives you cash in exchange for the equity that you have built up in your property.
Refinancing: You can choose between a rate-and-term refinance or a cash-out loan. No money changes hands in a rate-and-term refinance. Only the costs associated with closing are paid, and funds from the new loan pay off the old loan. A cash-out loan is where you get some of the equity in your home as cash.
The closing cost for refinancing should be 2% to 3% of your loan amount, and you may even have to pay taxes depending on where you live. If you refinance, plan to spend at least another year in the same home. If you’re sure of recovering your closing costs, then you can consider a rate-and-term refinance with a lower interest rate within 18 months. If you’re not planning on staying at home for a long period of time, then a home equity loan may be a better choice.
Home equity loans: These loans have lower interest rates because your property is the collateral for these loans. If you default, the lender can take away your home. You can either borrow a lump sum or choose a home equity line of credit (HELOC). HELOC functions like a credit card and lets you borrow as little or as much of that credit as you need. There may be a transaction fee for each withdrawal or an inactivity fee if you don’t use the credit line within a certain amount of time. You can only borrow during a set draw period, and the line of credit expires when the period ends. That’s when you have to start paying back the principal plus interest.
If you choose to take a traditional lump-sum home equity loan, it can be referred to as a second mortgage and attracts a higher interest rate.