Cash-Out Refinance vs. Home Equity Loan

Home equity has soared over the past year. According to the National Association of Realtors, the median home price in America increased 16% between the third quarter of 2020 and the third quarter of 2021.

Metropolitan areas saw an even higher jump of up to 30%. This is good news for folks who already own a piece of real estate! Do you want to make the most of your home’s increased value? A cash-out refinance or a home equity loan might be in your future…but how do you know which is the better product? Following are the features and benefits of each.

Cash-Out Refinance

• Borrowers take a one-time draw from their home’s equity. The interest rate is usually fixed, and borrowers decide prior to closing how much cash they would like to receive.
• The amount of cash received at closing is limited by the home’s value and the borrower’s ability (and desire) to make the associated monthly payment.
• Rising equity in a sellers’ market has increased the amount lenders are able to offer.
• Market conditions have resulted in attractive rates in recent months.
• Funds can be used for projects, home renovation, debt pay-down, or almost anything a borrower chooses. Borrowers may take one lump sum check at closing or have the lender pay creditors or contractors directly.
• If the borrower already has a mortgage, the outstanding balance would be refinanced into the new mortgage.
• A cash-out refinance will have a higher interest rate than a no-cash-out refinance but may still come with a lower rate than the existing mortgage. This could happen if rates have declined since the borrower(s) obtained the existing mortgage and/or if the borrower(s) have improved their credit score or other underwriting considerations.

A cash-out refinance takes advantage of your home’s equity as a vehicle for obtaining a sum of cash for other purposes. Cash-out refinance loans can be great financial tools when the market offers lower interest rates (as in right now!). Typically, underwriters see a primary residence as a safe form of collateral to balance the risk the bank will take in making the loan. The home’s value, combined with the buyer’s payment history and capacity to repay the new loan, can further lower the rate on a cash-out.

If you plan to pay off debt, a cash-out refinance can be structured to pay creditors right at closing. Your new housing payment replaces the aggregate of all the other payments you were making, which usually results in a lower monthly debt burden overall.

If your goal is to renovate, add on to your home, or start a business, a cash-out refinance can be used to pay for those as well as other things.

Home Equity Loan

• Borrowers obtain a one-time loan or a line of credit they can draw from now or in the future.
• The rate may fluctuate if market conditions change in the future. This is because the bank is essentially lending money over an extended period and must account for the increased risk.
• The open-ended version of this product is also known as a Home Equity Line of Credit (HELOC)

One thing to keep in mind regarding Home Equity Loans and HELOC’s is that they do come with a maximum loan amount. The collateral is still the subject property (i.e. your home) and therefore the maximum that will be lent at any given time is a percentage of the appraised value. Home Equity Loans or HELOC’s can be useful when the subject property has increased in value and a homeowner wants to take out a second mortgage without refinancing the first one into the new loan.

Talk to a Loan Officer

A loan officer will advise on which product is best for you based on your credit history, the anticipated value of your home (before an in-person appraisal is ordered), and any other factors that an underwriter would consider. If you want to leverage your home’s equity for cash, visit https://ruoff.com/find-a-loan-officer to get connected with an experienced member of the Ruoff Mortgage team.