Home equity loans and cash-out refinances are popular options for homeowners to convert their equity into cash. Knowing your needs and budget can help you make the right choice. Use our table to compare the key differences between the two options to help guide your decision.
Just like a standard home loan, you can usually access up to 80% of your equity without paying Lenders Mortgage Insurance (LMI). So, while you may own $200,000 of equity, you may be limited to accessing $160,000.
Home equity line of credit (HELOC)
For many, a HELOC is considered the cheapest way to get equity out of a house without having to restructure their existing mortgage. With a HELOC, you can draw funds as needed, repay them, and then draw again during the draw period, which can last up to 10 years.
6 Typically, lenders can offer 80% or 85% of the value of the equity you hold.
Withdrawing from an ATM
Press the Equity Button on an Equity Bank Atm machine. Enter your Equitel phone number. Select/Type amount of money you want to withdraw from an ATM machine. You will receive a pop-up message on your phone asking you to confirm that you want to withdraw the amount requested.
A $50,000 home equity loan comes with payments between $489 and $620 per month now for qualified borrowers. However, there is an emphasis on qualified borrowers. If you don't have a good credit score and clean credit history you won't be offered the best rates and terms.
Key Takeaways
Home equity loans should only be used to add to your home's value. If you've tapped too much equity and your home's value plummets, you could go underwater and be unable to move or sell your home.
Home equity loans, home equity lines of credit (HELOCs), and cash-out refinancing are the main ways to unlock home equity. Tapping your equity allows you to access needed funds without having to sell your home or take out a higher-interest personal loan.
To qualify for a home equity loan or line of credit, you'll typically need at least 20 percent equity in your home. Some lenders allow 15 percent. You'll also need a solid credit score and acceptable debt-to-income (DTI) ratio.
There's generally no set period for how soon you can take equity out of your home after purchasing it. Your ability to borrow can depend on your credit scores, debt-to-income ratio, and how much equity you've accumulated in the home.
An investment in an open end scheme can be redeemed at any time. Unless it is an investment in an Equity Linked Savings Scheme (ELSS), wherein there is a lock-in of 3 years from date of investment, there are no restrictions on investment redemption.
By taking out a home equity loan, you can use the funds to pay off all your credit card balances at once. This allows you to consolidate multiple debts into a single loan with a potentially much lower interest rate and a more manageable monthly payment.
Closing costs for a cash-out refinance loan are usually about 3-6% of your newly established mortgage. So for a $400,000 property, the estimated closing costs would be $12,000-$24,000. Similar to your original mortgage, the costs normally cover: Origination fees.
It can be accessed in the form of a home equity loan, home equity line of credit or cash-out refinance. Tapping these funds can give you access to cash, often at lower rates than personal loans or credit cards.
Equity release works by borrowing cash against the value of your home. There are two ways to do this – a lifetime mortgage and a home reversion plan. Lifetime mortgages allow you to unlock some of the value from your home.
Cash-out refinance gives you a lump sum when you close your refinance loan. The loan proceeds are first used to pay off your existing mortgage(s), including closing costs and any prepaid items (for example real estate taxes or homeowners insurance); any remaining funds are paid to you.
If you're wondering, "Can you pull equity out of your home without refinancing?" The answer is yes. There are multiple financing options homeowners can pursue that don't impact their current mortgage.
Key takeaways
A home equity loan works well if you have a big ownership stake and need a large, fixed lump sum. A cash-out refinance may be the smarter option if you want a lower interest rate and to deal with just one big debt.
Key takeaways
On the downside, HELOCs have variable interest rates, so your repayments will increase if rates rise. Another risk: A HELOC uses your home as collateral, so if you don't repay what you borrow, the lender could foreclose on it.
Based on those repayment terms and rates, here's how much you can expect to pay each month on a $100,000 home equity loan: 10-year fixed home equity loan at 8.50%: $1,239.86 per month. 15-year fixed home equity loan at 8.41%: $979.47 per month.
Calculating the monthly cost for a $50,000 loan at an interest rate of 8.75%, which is the average rate for a 10-year fixed home equity loan as of September 25, 2023, the monthly payment would be $626.63. And because the rate is fixed, this monthly payment would stay the same throughout the life of the loan.
To qualify for a HELOC, you need to have available equity in your home, meaning that the amount you owe on your home must be less than the value of your home. You can typically borrow up to 85% of the value of your home minus the amount you owe.