Many home owners find themselves in need of money for major expenditures like home improvement or home repairs. There are many options for the home owner including mortgage refinancing or refinancing your home in order to gain the necessary cash. There are three basic options for borrowing against the equity of the home and each one has its advantages and disadvantages, depending on the need of the home owner and the circumstances.
For home owners that qualify for mortgage refinancing cash-out refinancing may be the best option. With cash-out refinancing, the home owner takes out a new mortgage, replacing the existing mortgage, while borrowing more than what is currently owed.
Generally, a cash-out refinance will offer the lowest interest rate out of all three options and the most flexible term options whether it will be an adjustable rate mortgage, fixed interest or the length of the loan. The added bonus is that the home owner will continue to have one monthly payment to meet.
The drawback is a cash-out refinance may have the greatest amount of costs involved including closing costs. Just as the home owner had to pay closing cost on the original mortgage, cash-out refinancing also will have closing costs. The home owner may also have to extend the length of the loan so that it remains affordable, but that could affect retirement if it is extended for too long.
Home Equity Loan
The home owners existing mortgage stays in place with a home equity loan. Instead, a certain amount is borrowed against the remaining equity of the home. Closing costs are significantly lower than a cash-out refinance as it is a smaller loan. A home equity loan also allows the home owner to keep his current mortgage rates which can be beneficial if the interest rates are higher than when the original mortgage was obtained.
The disadvantage is, generally, that the home owner will pay higher interest rates on a home equity loan rather than on a cash-out refinance loan. The terms of a home equity loan are also much shorter than a cash-out refinance which means the monthly payments are higher as well.
Home Equity Line of Credit
A home equity line of credit, or HELOC, is different than mortgage refinancing. Rather than borrowing one lump sum or borrowing money up front, with a HELOC the home owner arranges to borrow money in increments as the need arises. This can be extremely helpful if the home owner plans on doing multiple projects spread out at various points in time.
There are little to no closing costs involved with a home equity line of credit, but the interest rates tend to be much higher and they are variable, so they could rise significantly by the time the last funds are drawn.
Mortgage refinancing or refinancing your home in order to improve the home can be a good investment if done properly. Home improvements can appreciate the value of the home and in time, the home owner may see a good return on that investment.
Powered by Facebook Comments