Home equity lines of credit, second mortgage loans, home equity loans, reverse mortgage loans and finally cash-out refinancing. All are ways to leverage the equity or extra cash value your home has accrued and use it to make home improvements, pay off debt or just take a nice big vacation to Hawaii with all the kids. A home equity line of credit or loan is different from a cash-out refinancing. The difference is in a home equity loan or line of credit the lender is looking at your home and appraising it for more than you owe then giving you a loan based on that value. For instance if you owe 100,000 dollars on a home that is worth 200,000 dollars then the bank is likely to give you a loan for that extra amount based on the fact that if you sold the home for its current value you could pay the bank (lender) back with little difficulty. This makes it a low risk loan for the lender, and lenders love low risk loans.
A cash-out refinancing loan is very similar, the difference is you (the borrower) refinances your home completely and gains a new first mortgage, but your refinance the home for its current value, essentially buying the home again. When you get your new loan you take the difference between what you owed on the home and the new loan and you keep that cash out right.
For example: Say you owe $225,000 on your home mortgage loan and your home is actually worth $400,000, and you need some cash. Maybe you want a new pool or to install hard wood flooring in the entire bottom floor of your home, and shoot your credit is better than when you first bought the home so maybe you can even get a lower interest rate. You could refinance your home for $250,000 and probably get a lower interest rate given that your credit is still in good standing and get $25,o00 for that new pool you wanted.
Even though a cash-out refinancing loan is similar to a home equity line of credit or a home equity loan, it still differs in many ways:
- Mainly a home equity loan is an additional loan on top of your first mortgage home loan.
- The interest rates of cash-out refinancing loans are not always, but usually lower than a home equity line of credit or a second mortgage.
- Unlike a equity line of credit which has no closing costs a home refinancing loan including a cash-out refinancing has closing costs that the borrower almost always has to pay.
- A cash-out refinancing loan is a replacement to your original first mortgage loan.
- Closing costs need to be taken into consideration as they can cost thousands of dollars up front.