Cashing Out Equity

Debt Consolidation Options

There are three main ways to convert equity in your home into cash. We’ll give a thumbnail description of each type here, and then provide details about each below.
With a cash-out refinance, you refinance into a new mortgage with a value greater than that of your existing mortgage. That means that you are pulling out money already paid on your home, and will now repay it through the new loan.
A home equity loan allows you to borrow up to 100% of the value of your home in the form of a one time loan.
A home-equity line of credit allows you to borrow against the equity of your home on a revolving basis somewhat like a credit card.

Cash-Out Refinancing

Like a regular refinance, a cash-out refinance replaces your existing mortgage with a new mortgage. However, in a cash-out refinance you borrow more than you borrowed for your current mortgage. That extra amount, minus refinancing fees, is given to you at the time of closing in a check. This process essentially converts existing equity in your home into cash, which you must then repay with interest through the new mortgage.

Consider these features of a cash-out refinance:

Home Equity Loan

A home-equity loan allows you to borrow against the equity in your home. This type of loan may be suitable for one-time major purchases. For people on a fixed income, it provides the consistency of knowing exactly what your monthly payments will be. It will require a separate second payment each month, in addition to your regular mortgage payment.

Consider the features of a home-equity loan:

Home Equity Line of Credit (HELOC)

As with a home equity loan, you will be able to borrow up to 100% of your current equity through a home equity line of credit. However, this amount is not distributed to you as a lump sum. Instead, it provides an optional line of credit that you can use as needed. You can also repay it either within the month or through a payment plan. So it functions like a credit card. This type of loan is suitable for people with occasional extra expenses, or who wish to have an emergency line of credit available for unexpected expenses.

What’s the Conclusion?

Refinancing into a larger mortgage, as occurs in cash-out refinancing, makes sense if you are seeking a lower overall rate of interest or a longer term. This option may also be available to more people, as lenders use less stringent guidelines for qualifying borrowers. A home equity loan or home equity line of credit is appropriate when you need quick cash, along with flexibility in the terms of use and repayment.

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