Refinancing Mortgage – Your home is not just a place to live, and it is not just an investment. It is both, and more. Your home can be an easy source of ready cash to cover emergencies, repairs or upgrades. The process of releasing the money you invested in your mortgage is called mortgage refinancing, but there are many ways to do this.
A refinance pays cash from your old mortgage in exchange for a new mortgage, ideally at a lower interest rate. A home equity loan gives you cash in exchange for the equity you’ve built up in your property as a separate loan with specific repayment dates.
First, let’s cover the basics. Cash-out refinance and home equity loan are both types of mortgage refinance. There are many other types of mortgage refinancing, and you need to consider whether refinancing is right for you before looking at the difference between a cash-out refinancing and a home equity loan.
Refinancing Your Home Loan? What You Need To Know
Broadly speaking, there are two common methods of refinancing a mortgage or refinance. There is a rate and term refinance, where you effectively swap your old mortgage for a new one. In this type of refinancing, no money changes hands except closing costs and funds from the new loan paying off the old loan.
Another type of refi is a collection of different options, each of which releases a portion of your home equity:
So why would you want to refinance your mortgage? Well, there are two main reasons – to lower the total cost of your mortgage or to release some equity that would otherwise be tied up in your home.
Let’s say, 10 years ago, when you first bought your home, your 30-year fixed rate mortgage had 5% interest rates. Now, in 2021, you can get a mortgage at an interest rate of 3%. Those two points can shave hundreds of dollars a month off your payments and even more off the total cost of financing your home over the life of the loan. In this case refinancing will be beneficial for you.
Refinancing: What You Should Know
Even if you’re happy with your mortgage payment and term, a home equity loan is worth looking into. Maybe you already have a low interest rate, but you’re looking for extra money to pay for a new roof, add a deck to your home, or pay for your child’s college education. This is a situation where a home equity loan can be attractive.
Before looking at the different types of refinancing, you need to decide if refinancing is right for you. Refinancing has many advantages. It can provide you with:
However, you should not look at your home as a good source of short-term capital. Most banks won’t let you finance more than 70% of the home’s current market value, and refinancing costs can be significant.
Mortgage lender Freddie Mac recommends budgeting about $5,000 for closing costs, including appraisal fees, credit reporting fees, title services, lender origination/administration fees, survey fees, underwriting fees and attorney fees. Closing costs for any type of refinance are likely to be between 2% and 3% of your loan amount, and depending on where you live, you may be subject to taxes.
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With any type of refinance, you should plan to continue living in your home for a year or more. A rate and term refinance can be a good idea if you can recoup your final cost with a lower monthly interest rate within about 18 months.
If you don’t plan to stay in your home for long, refinancing may not be the best option; A home equity loan may be a better option because closing costs are lower than a refinance.
A cash-out refinance is a mortgage refinance option where the old mortgage is replaced with a new mortgage that has a larger amount than what was owed on the existing loan, helping borrowers get some cash by using their home mortgage. You typically pay a higher interest rate or more points on a cash-out refinance mortgage compared to a rate and term refinance, where the mortgage amount remains the same.
The lender will determine how much money you can get for a cash-out refinance based on the bank’s standards, your property’s loan-to-value ratio and your credit profile. The lender will also evaluate the previous loan terms, the balance required to repay the previous loan and your credit profile. The lender will then make an offer based on the underwriting analysis. The borrower gets a new loan that pays off the previous loan and is locked into a new monthly installment plan for the future.
Why Refi Infographic
The main advantage of a cash out refinance is that the borrower can get some of the value of their property in cash.
With a standard refinance, the borrower will not have cash in hand, but will see a reduction in their monthly payments. Cash out refinances can go as high as a loan-to-value ratio of around 125%. This means that the refinance pays off what they owe, and then the borrower can qualify for up to 125% of the value of their home. Amounts above and beyond the mortgage payment are paid in cash just like a personal loan.
On the other hand, cash-out refinance has some disadvantages. Compared to rate and term refinancing, cash loans come with higher interest rates and other costs, such as points. Cash out loans are more complicated than the rate and term and usually have higher underwriting standards. A high credit score and low loan-to-value ratio will alleviate some concerns and help you get a more favorable deal.
A home equity loan is an option for refinancing. These loans have lower interest rates than unsecured personal loans because they have your property as collateral, and there’s a catch: the lender can come after your home if you default.
The Pros And Cons Of Refinancing
Home equity loans also come in two flavors: traditional home equity loans, where you borrow all at once, and home equity lines of credit (HELOC).
A traditional home equity loan is often offered as a second mortgage. You have your primary mortgage, and now you are taking out a second loan against the equity you have built up in your property. The second loan is subordinate to the first – if you default, the second loan is in line behind the first loan to collect any amount owed on the foreclosure.
For this reason, home equity loan interest rates are higher. Lenders are more at risk. A HELOC is sometimes referred to as a second mortgage.
A HELOC is like a credit card that is tied to your home equity. You can usually borrow as little or as much credit as you want for a certain period of time after getting it, called a draw period, although some loans require a minimum amount to be withdrawn first.
Everything You Need To Know About Home Loan Refinances
If you do not use your line of credit at any time during the predetermined period, you may be required to pay a transaction fee each time you make a withdrawal or pay an inactivity fee. During the draw period, you pay interest only on the amount borrowed. When the draw period ends, so does your line of credit. You start paying principal plus interest when the repayment period begins.
All home equity loans typically have a fixed interest rate, although some are adjustable, while HELOCs typically have an adjustable interest rate. The APR for a home equity line of credit is calculated based on the loan’s interest rate, and the APR for a traditional home equity loan typically includes the costs associated with loan origination.
Home equity loans have a variety of benefits that can be attractive options for homeowners who want to lower their monthly payments while taking out a lump sum. Refinancing with a home equity loan can offer the following:
Discrimination in mortgage lending is illegal. If you believe you have been discriminated against based on race, religion, gender, marital status, use of public assistance, national origin, disability, or age, you can take action. One such step is to file a report with the Consumer Financial Protection Bureau and/or the Department of Housing and Urban Development (HUD).
What To Know About Refinancing A Mortgage In 2022
In theory, cash out refinancing gives you quick access to the money you already have invested in your property. With a cash-out refinance, you pay off your current mortgage and move on
In a new one. This keeps things simple and can free up a lot of money very quickly – money that can also help improve your property’s value.
On the other hand, cash-out refinances are often more expensive in terms of fees and percentage points than home equity loans. You need to have a good credit score to get approved for a cash out refinance as the underwriting standards for this type of refinance are usually higher than other types.
Home equity loans are easier for borrowers with low credit scores and can release the same amount of equity as a cash-out refinance. Home equity loans are generally less expensive than cash-out refinances and this type
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