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9/12/2024 HELOC or Home Equity Loan?Homeowners looking to access home equity have a number of possibilities, including a cash-out refinance on their existing loan, or deciding between a HELOC and a Home Equity Loan. Which should you choose? When making the decision how to access equity, it’s important to understand the specifics of your options.
Cash-Out Refinance A cash-out loan is generally referring to the refinance of an existing 1st mortgage into a new larger mortgage where the increased loan amount is the cash given to the homeowner. This is a popular option when homeowners have the chance to lower their rate on the existing mortgage while pulling out the larger loan and corresponding “cash out”. The problem with this option in today’s world is that most homeowners have a mortgage rate much lower than current market choices. Therefore, refinancing a 3.0% loan with a balance of $300,000 into a new $375,000 loan at 6.5% doesn’t pencil out. Raising the rate on $300,000 by 3.5% doesn’t make sense just to access $75,000. Home Equity Loan This option refers to taking out an additional lien, while leaving existing financing in place. Home Equity Loans allow a homeowner to keep that existing 3.0% $300k loan (using the above example) while accessing the $75k equity via a fixed rate 2nd mortgage at say, 8%. The blended rate of 4.0% on the two mortgages in this case is much better than the 6.5% in the cash-out refinance option. In today’s market, the Home Equity Loan is generally better than the cash-out refinance option. But there’s also another route to look at for those desiring to access home equity… Home Equity Line of Credit (HELOC) Utilizing a HELOC also involves taking out a new lien, like Home Equity Loans, but the main difference is in the loan’s structure. While we detail HELOC’s in full here, the primary consideration when comparing with Home Equity Loans is the adjustable rate feature in HELOC’s, versus the fixed rate aspect that comes with most Home Equity Loans. Adjustable usually screams risk for most, but in today’s market, adjustable may be a good thing. The FED has already indicated that it will likely drop rates at it’s next meeting. While this doesn’t immediately impact long-term 30-year fixed rates (as those are already priced in), HELOC’s generally see an immediate rate drop due to the decline with index values controlled by the FED. So getting a HELOC may be preferred over a Home Equity Loan, as you may be paying lower interest over time as the HELOC loan rates drop. HELOC’s also allow you to only pay interest on the money borrowed, since they function like credit cards. Whereas Home Equity Loans provide you all cash-out upfront, requiring you to immediately pay interest on those funds. With the above being said, there are always numerous additional factors and considerations when choosing your best route. Contact us any time…we’re here to help you navigate your options! Comments are closed.
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