Refinance cash for cash vs. home equity loan
- Both real estate equity loans and cash refinancing allow you to convert home ownership into cash.
- Cash refinancing replaces an existing mortgage with a larger mortgage.
- A home equity loan is a second mortgage and comes with an additional monthly payment.
Owning a home allows you to create equity that you can turn into cash when you need it, whether for home repairs, your child’s college tuition, debt payments, or any other financial needs.
Cash refinancing and home purchase loans are two of the most popular tools available for doing this. But they are not created equal. Here’s what you need to know about each to help decide which option is best for your situation.
Cash Refinancing vs. Real Estate Purchase Loan: At a Glance
Both cash refinancing and real estate purchase loans allow you to access your home ownership with a one-time payment.
The main difference between the two is:
- cash refinancing Replace your existing mortgage loan with a larger loan. You get the difference between the two balances in cash.
- home purchase loan It is a new loan in addition to your existing mortgage. It comes with an additional monthly payment.
In either case, there are no restrictions on how the funds can be used. Many people use cash refinancing and home purchase loans to pay for it
or repairs. Since mortgage loans often carry lower interest rates than other financial products, some homeowners see cash refinancing as a good way to consolidate other debts.
What is cash refinancing?
Cash refinancing works like this: You apply for a new mortgage that is larger than your existing one. Once approved, this loan is used to pay off your old loan, and you’ll get the difference back in cash at closing.
Cash refinancing comes with either adjustable or fixed interest rates with terms between 15 and 30 years. Typically, the loan-to-value (LTV) ratio can be up to 80% of the value of your home. There will be too
– Usually about $5,000 on average.
The biggest benefit of cash refinancing is that it comes without additional payments. It also usually comes with a lower interest rate than a home purchase loan.
“It’s the cheapest way to borrow against the equity in your home,” says Melissa Cohn, regional vice president for William Raveis Mortgage.
With cash refinancing, your mortgage interest payments are tax deductible. Depending on the price and loan balance, this can significantly reduce your taxable income.
The downside to cash refinancing is that it replaces your existing mortgage, which could mean trading a lower rate for a higher rate. There are also closing costs to consider. If you think you might sell the house soon, those costs may not be worth it.
“If you’re going to be borrowing money long-term, cash refinancing makes sense,” Cohen says.
Example of cash refinancing
Let’s say your home was worth $500,000, and your current mortgage loan balance was $300,000.
The cash refinancing process may look like this:
- You have applied for a new mortgage loan. Since cash refinancing typically allows for up to 80% of the lifetime value, this means that you can apply for financing up to $400,000 ($500,000 x .80).
- You must submit the required financial documents. Lenders typically request bank statements, payment slips, tax returns, and W-2s, among other items.
- Rate your home. In most cases, the lender will want to check the value of your home with a new appraisal.
- You will close on the loanThe new loan will be used to pay off the old mortgage balance, leaving you with a $100,000 increase.
- You’ll get $100,000 in one go within a few days of closing.
What is a home equity loan?
A home equity loan is a type of second mortgage. Unlike cash refinancing, it does not replace your existing mortgage loan. Instead, it’s a loan in addition to the original mortgage – which means you’ll have two monthly payments.
Home purchase loans usually come with fixed interest rates and terms ranging from five to 30 years. These loans also come with closing costs, although they are usually lower than what you’ll see in a cash refinancing. Some lenders will cover it all. In most cases, home equity loans give you access to up to 80% of the value of your home — via both a home equity loan and your primary mortgage. Some lenders may have limits as high as 90% for some borrowers.
The main disadvantage of a home equity loan is that it comes with a second monthly payment. Prices can also be higher, and interest costs may not be tax deductible. With mortgages, you can only deduct interest if you use the money to “buy, build, or significantly improve” your home. Until then, you’ll need to itemize your returns to take this discount.
On the plus side, home equity loans allow you to keep the terms of your original mortgage, which may be fine if you’re too far from your amortization schedule when more of your payments are directed toward your principal balance rather than toward interest. It’s also smart if interest rates on traditional mortgages are going up, and you don’t want to lose the low rate you already have.
“For homeowners whose base mortgage rate is lower than current market rates, a home equity loan is likely to be the best option,” says Nicole Straub, senior vice president and president of Discover Home Loans. “By choosing this option, it allows them to maintain the low rate they have while also allowing them to benefit from the equity they own in their homes.”
Example of a loan to buy a house
Let’s say your home is worth $500,000. Since home equity loans typically allow for loan-to-value ratios of 80%, you can access up to $400,000 via both a principal mortgage and a new home equity loan. If your current mortgage balance is $350,000, for example, a home equity loan should offer you up to $50,000 cash advance ($400,000 – $350,000).
To get your home equity loan, you need to apply to your chosen lender, submit documentation, and have your home appraised. Once you’ve paid the closing costs and signed the paperwork, you’ll receive a lump sum payment a few days later. You will then start making monthly payments on your home equity loan starting the following month.
put everything together
Both home purchase loans and cash refinancing can help you turn your equity into cash. But the best option depends on your unique budget, the terms of the original mortgage, and your long-term plans as a homeowner.
Either way, home buying loans and cash refinancing are more likely to save you money than other financial products you might consider.
“Both home purchase loans and cash refinancing are types of secured debt with an average interest rate typically lower than you’ll find with other types of unsecured debt—such as credit card or personal loans,” Straub says.
If you are not sure which product is right for your situation, reach out to your mortgage broker or financial advisor for assistance. You can also ask lenders to submit quotes for both products and compare the two options side by side.