Cash-Out Refinance, Home Equity Loan and HELOC

by | Apr 4, 2022 | Cash-Out Refinance, HELOC, Home Equity, Home Equity Line of Credit (HELOC), Home Equity Loan

One of the advantages of homeownership is the equity in your home. The equity you build in your home functions as a forced savings account that you can eventually tap into. Maybe you’re ready to take advantage of your home’s equity. There are a number of ways you can utilize the equity in your home, including a cash-out refinance loan, home equity loan, and home equity line of credit (HELOC). The method you choose depends on your financial needs and goals and how you want to utilize your home equity.

Cash-Out Refinance Loan

A cash-out refinance is a mortgage loan that replaces your original home loan with a larger loan based on the equity your home has collected over the years. Equity is the amount of a home’s value that has been paid off. Homeowners gain equity through paying down the principal of their mortgage with their monthly mortgage payments, or through the value of their home increasing over time.

At this time, VeteransLoans.com does not offer home equity loans or home equity lines of credit but offers conventional, FHA, and VA cash-out refinance loans.

Home Equity Loan

A home equity loan is a loan where you borrow a lump sum of money based on the equity in your home. It is technically a second mortgage with a fixed interest rate that you make payments on in addition to your regular mortgage payments. If your home is already paid off and you take out a home equity loan, it will be considered your primary mortgage.

Home Equity Line of Credit (HELOC)

A home equity line of credit is similar to a home equity loan as it is considered a second mortgage that requires additional monthly payments. However, with a home equity line of credit, you do not withdraw a lump sum of cash. A HELOC functions more like a credit card as you will borrow money from your line of credit as needed during a draw period.

When your draw period is completed, you will repay your loan during a repayment period. HELOCs typically come with adjustable interest rates as opposed to fixed rates, so monthly payments can vary.

Similarities Between Cash-Out Refinance, Home Equity Loan, and HELOC

  • An after-transaction loan-to-value ratio of 90% or less is necessary to qualify.
  • The money you receive can be used however you see fit, though it is recommended that you use the money for home improvements, increasing the equity you have in your home, or debt consolidation.
  • Your home is used as collateral. Failure to make your payments can lead to foreclosure.
  • You can use the cash or line of credit for any expenses that you choose. You are not restricted in terms of how you use this cash, loan, or line of credit.

Differences Between Cash-Out Refinance, Home Equity Loan, and HELOC

  • Interest rates are typically higher for home equity loans or HELOCs than for cash-out refinances.
  • Closing costs are lower for home equity loans and HELOCs and higher for cash-out refinances.
  • A home equity loan or HELOC adds a second mortgage whereas a cash-out refinance replaces your mortgage, so you still have only one mortgage after you refinance.

Contact a Loan Specialist

Interested in refinancing? The loan specialists at VeteransLoans.com can determine your eligibility and get you pre-approved in a matter of minutes! Call 1 (888) 232-1428 to speak with a VA-approved loan specialist today!

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