Home Equity Loans, Lines Of Credit, And Cash-Out Refinancing: What's The Difference?
If you have a lot of equity sitting in your house and a lot of expenses coming up, what's the best way to put that equity to good use: a home equity loan, a line of credit, or a cash-out refinancing plan?
Use this guide to learn the difference and see what makes the most sense for you.
Home Equity Loans
Home equity loans are often the easiest for homeowners to understand, they work essentially just like a mortgage does. Sometimes referred to as a "second mortgage," home equity loans allow you to borrow a certain amount of your equity for a set period of time. You can usually choose between a fixed rate of interest and a variable one.
Second mortgages are much harder to come by these days than they once were, you generally need substantial income and really good credit. They're most likely to be approved when you have a well-established relationship with your bank and when you have a specific purpose for the loan and need one lump sum at once.
Home Equity Credit Lines
Home equity lines of credit, or "HELOCs," let homeowners use the equity in their house as collateral. That means that you can only potentially borrow up to the total amount of your equity, although banks usually limit loans to a little less so that they have room to negotiate if they have to repossess.
Unlike regular loans, HELOCs allow you to take out just what you need, as you need it. You're usually given a checkbook or credit card that you can use to access the funds a bit at a time. They're particularly useful when you're planning renovations, for example, over a period of time. Unfortunately, your payment can go up as you borrow more, which can make your payments uncertain.
If you owe nothing on your home or have a lot of equity, cash out refinancing is a great option regardless of your purposes for the money. They operate exactly like a brand new loan. You roll any existing loan into the new one and take the additional equity you need, with only one payment. Many times you can get a lower interest rate than you had before. That gives you the crucial advantage of a single, stable payment in the future, which can be awfully attractive.
If you need to get hold of the equity in your home, talk to a financial expert today about your options.