As you pay down the mortgage on your home, the equity in your home increases. After a few years, you may find that you have a good chunk of money in your home. There are a couple of ways to gain access to your equity, one of these is the cash out refinance and the other is a home equity loan. So when you ask yourself ‘should I pull the equity out of my mortgage’ you won’t want to answer that until you’ve done a little research because they both have their pros and cons. Here are a few things you should know about these options.
Here are some other great informational articles about your equity
Getting equity with a Cash Out Refinance
refinancing a mortgage to tap into the equity of your home isn’t an uncommon financial move. people have been doing this for many years and they will continue to do so for a very long time. While this may seem very risky for some, you are essentially increasing your debt, it can be a good financial move when done correctly.
First, ask yourself why, why do I need the money? If the answer comes up that you want a new car or a vacation, you may want to rethink that refinance. However, if you need the money for sound investments or to upgrade the home you are in, which will increase the value of the property, the refinance may be worth considering.
When you refinance your mortgage, you are essentially taking out a new loan on the home. So for many people the refinance is a great option because they can adjust the loan terms until it works to their advantage. First and foremost is the interest rate. Today’s rates are very low, so low, in fact, that many people want to refinance just to get the good rate. When you refinance and pull out equity, you are able to reduce the interest rate while you’re increasing your home debt. You may also be decreasing the amount you’ll pay over time; lowering the interest rate can help counteract some of that increased debt. In addition to the perks mentioned, you’ll also be able to secure a fixed rate mortgage to pay down the increased loan over a long period of time. The cash out refinance can be very beneficial when used correctly.
Home Equity Loans May Work to Your Advantage
While the cash out refinance can be a great option, it’s best not to jump into a refinance before you’ve weighed it against the home equity loan. Many homeowners choose the home equity loan over the refinance because to them the pros outweigh the cons. So let’s look at this for a minute. The home equity loan enables you to pull out your equity just like the refinance does. When you take out either of the loans, you will have to pay closing costs. For the home equity loan, these costs are often lower, and these loans are typically done more quickly than a refinance. However, the low closing costs are counteracted by higher interest rates. A refinance, on the other hand, may offer lower interest rates but it will have higher closing costs. In addition, the terms for a home equity loan are typically shorter (but that can be a good thing).
Pros and Cons
- The home refinance has higher closing costs, oftentimes lower interest rates, and it increases the amount of your mortgage.
- A home equity loan has lower closing costs, a higher interest rate, is a loan separate from your home mortgage, and has a shorter payback time.
So when you ask yourself ‘should I pull the equity out of my mortgage’ you’ll have to determine what you want out of the loan. A good way to determine which will work best is simply to crunch some numbers and see which option enables you to pay less. The more you can save when you take out your equity, the better off you’ll be in the long run.