Home Equity Loan Pros
While there may be limits set by lenders or investors regarding how much of your existing equity you can take a loan against, you have the option to go with a fixed payment. That way, your payment never changes and you know what you’re getting.
Home equity loans also give you the flexibility to hold onto the existing rate and term of your primary mortgage if you’re happy with it.
If you’re looking to purchase a home, there is the option to take out a primary mortgage and then use a secondary mortgage to bring your total equity down to 80% and avoid paying for mortgage insurance. This may sometimes be cheaper than the mortgage insurance policy.
Be aware that if you’re going to do this, your lender may require you to make a slightly higher down payment (e.g. 10% or more) in order to have the option to take a second mortgage.
Home Equity Loan Cons
Since home equity loans are a second mortgage, you’re going to pay a higher rate than you would if it were your first mortgage because lenders assume you’re going to make payments on your primary mortgage first.
Your home equity loan lender gets a lien on your house, but the primary lender’s lien takes precedence. In exchange for the additional risk, the lender on the second mortgage will charge you more.
Additionally, home equity loans taken out to do things other than build, buy or improve your home haven’t featured tax-deductible interest since the 2017 tax year.
The last downside is that you have two mortgage payments to worry about. This last one is a big factor. Two mortgages can put a real strain on the monthly budget, so do the math and make sure you can make it work before you proceed.
Cash-Out Refinances: Overview, Pros And Cons
Like home equity loans, a cash-out refinance utilizes your existing home equity and converts it into money you can use. The difference? A cash-out refinance is an entirely new primary mortgage with cash back – not a second mortgage.
With any option, the more equity you have, the more you can take and convert to cash. The exact amount will depend on the type of loan you’re using and other factors, like your credit score . With a cash-out refinance, lenders typically limit the amount to 80% of the home’s value, leaving 20% equity. If you qualify for a VA loan , you can borrow up to 100% equity.
Cash-Out Refinances At A Glance
- You can borrow 90% of your home’s value (up to 100% with a VA loan)
- Easy to qualify for with the right FICO ® Score and amount of equity
- Low interest
- 15 – 30-year payback, among other term options
- The loan isn’t taxed, but you may be able to deduct interest
- The interest rate would be lower than a home equity loan because it’s your primary mortgage
- You only have one mortgage payment
Cash-Out Refinance Pros
The first big advantage is you’ll only have one mortgage against your house. That means there’s less risk for the lender and you’ll get a better rate than you would if it were a second mortgage. This is also why a cash-out refi is typically easier to qualify for, as it gives lenders first payback priority.
Another upside is low interest rates, which are good when trying to accomplish any payday loans with no credit check in Winchester TN financial goal. And, you’ll only need to budget for one mortgage payment.