With home values exploding in the Boise area, and interest rates at all-time lows, many homeowners are wondering what might be their best option to borrow against the equity in their home.

One way is to refinance your mortgage and get cash out. Another option is to apply for a home equity loan or line of credit or (HELOC).  Here are some of the pros and cons of each, that homeowners should consider before making a decision.

CASH-OUT REFINANCE

What is a cash-out refinance?
A cash-out refinance pays off your existing mortgage and replaces it with a new mortgage loan (often at a better interest rate),  and allows you to take cash in exchange for any equity you have in your home.  The new loan proceeds are first used to pay off your existing mortgage, closing costs, and any other prepaid items, and the remaining funds are distributed to you, to use in any way you want or need.  This new loan will have a different payment amount and amortization schedule.

PROS:

  • Possibility of a lower interest rate than your existing mortgage loan
  • Possibility of a lower monthly home payment
  • Typically lower interest rates than home equity lines

CONS:

  • Usually requires appraisal
  • Closing costs usually 2% to 3% of your loan amount
  • If you borrow more than 80% of the value of the home, it could require mortgage insurance

HOME EQUITY LOAN

What is a home equity loan?
A home equity loan is a secondary (or second) mortgage loan that you can take out in addition to your primary (or first) mortgage.  A home equity loan can be distributed in a lump sum or can be distributed as a line of credit (HELOC), to be used similar to how you would use a credit card.   Home equity loans or lines of credit will have their own terms and payment schedule separate from your primary home loan.

PROS:

  • Typically no, or low closing costs
  • Lines of credit remain open and can be used as needed
  • A great option for borrowing smaller amounts

CONS:

  • Higher interest rates
  • Separate loan and payment
  • More difficult approval process

Both a cash-out refinance, and home equity loan will provide you with a way to turn your home equity into cash to be used in any way you want.  Tackle that home improvement project, pay off other high-interest debt, or maybe it is time for a long-overdue vacation.    Whatever your needs, contact our loan experts at Capital Mortgage, and we’ll help you find the option that works best for your specific situation.

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