Home Equity Loans Versus Cash Out Refinancing
Home equity loans and cash out refinancing have a lot of features in common, but there are several key differences between these two types of loan products that consumers should understand. Both of these loans use a person’s house as collateral, but they are very different methods of debt consolidation.
A home equity loan is a loan that is taken out against the accrued equity in a home. Equity is equal to the value of the home minus the value of the mortgage against it. A home equity loan is only taken out against this calculated equity amount. The original mortgage is left intact, leaving a borrower with two loans out against his or her house.
Most of the time, these loans are used for debt consolidation, but they can also be used to finance the purchase of big ticket items such as cars or home repairs. In general, a home equity loan has either a set or variable interest rate, and payments are made in monthly installments. How long it takes to pay back the loan will depend on the amount of the loan and its interest rate.
Cash out refinancing loans are also dependent on these factors. Like home equity loans, many people use these loans for consolidating debt. Cash out refinancing is a refinancing of an entire mortgage. During this process, a bank appraises and makes a new mortgage offer on a home that a potential borrower already has a mortgage on. If accepted, the borrower uses the money from the new mortgage to pay off his or her old mortgage first. Any funds left over can then be used as the borrower sees fit.
In many cases, the borrower in cash out refinancing uses the extra funds to pay off his or her other loans. This result in the borrower only having one loan left, his or her new mortgage. Of course, funds from cash out refinancing can also be used to make a major purchase or as emergency funds in the case that a family has temporarily lost a source of income.
Both of these types of real estate based loans can help a consumer consolidate their debt or pay for big ticket items. It is important to realize that both of these types of loans are using a person’s house as collateral. This means that if a borrower cannot make payments, the bank can foreclose on their house.
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