Do you want to use the equity you have built up in your home? There are three ways in which you can do this: a credit line, a loan or a cash-out refinance, but which of these is going to be the best option for you to utilize? That depends on a number of factors: the amount which you want to borrow, the equity you have built up, the time period in which you will pay back the loan, type of term you opt for (fixed and flexible) and the rate on your existing mortgage.
We will evaluate all three options in details:
Home Equity Line of Credit
Abbreviated as the HELOC, a home equity line of credit uses your home to secure the amount you borrow. The rates for HELOC are usually adjustable, the payments comprise of only the interest amount and the period is around 10 years. During this time, you can access the funds, but when the term ends, you have to pay the remaining balance in a certain time period.
In most cases, you should be able to qualify for a HELOC if your income is adequate enough and your combined loan to value ratio is around 80% or 90%.
Home Equity Loan
A home equity loan, sometimes also referred to as a second mortgage, lets you borrow a specific amount for certain time period. The interest rate can either be fixed or variable. These loans are not that popular any more, but there are still some banks which offer them.
Instead, most of the agencies offer an alternative, similar to a fixed rate loan. In this loan, you pay both the interest amount and the principal together. Now when the draw period expires, the outstanding balance is not that huge.
A cash-out refinance is a new first mortgage loan, but with cash back. If you want to refinance and also want some cash, this is a good choice. With this option, you combine both your equity and mortgage in one loan and so repayment is easier.
Generally, there is a limit of around 80% on the cash which you can take out.
One Last Word of Advice
Whichever option you choose, do consider the closing costs, fees and rates. Generally, fees for cash out refinance are greater, but the interest rate on such a loan is usually low.