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TERMINOLOGY
If you are trying to decide between a cash-out refinance and a home-equity loan, there are a number of different things that you are going to need to take into consideration. Here are the basics of whether you should choose a cash-out mortgage refinance or a home-equity loan.
The Difference
With a cash-out mortgage refinance, you are going to be taking out a completely new mortgage on your house. You are going to take the money from this new loan and use it to pay off your old mortgage. You will then get to keep the amount of money that is left over after you pay off the loan. With a home-equity loan, you are going to be keeping your original mortgage and taking a second loan out on your house.
Small Balance
To decide which type of loan is going to be best for you, you need to look at your existing mortgage balance. If you are very close to paying off your original mortgage, it may not make sense to take out a mortgage for the whole amount of the value of your house again. Instead, you might want to take out a home-equity loan just for the amount that you need. By doing this, you will be able to get a short-term home-equity loan. Traditionally, a short-term home-equity loan usually has the lowest interest rate of any loan that you can get. It will usually be lower than a fixed-rate mortgage as well.
Interest Rate
When you are trying to decide what to do, you also need to look at the interest rate on your existing mortgage. If you have a large mortgage balance, you will not want to refinance your loan unless you can get a lower interest rate. It does not make much sense to refinance a $150,000 mortgage and take a higher interest rate if you need to borrow only $20,000 or $30,000. Instead, keep your existing mortgage and then get a home-equity loan for the smaller amount that you need to borrow.
Economy
Something else that you will want to look at when you make your decision is the strength of the economy. If the economy is weak, this means that the prime interest rate is most likely going to be low. When the economy gains strength, the prime interest rate increases. If you think that the economy is going to be poor for a few years, it might be better for you to take out a home-equity loan. Home-equity loans traditionally have adjustable interest rates that are tied to the prime rate. Therefore, if you believe that the economy is going to be bad for a few years, it might be to your advantage to have an adjustable rate on a home-equity loan. This will allow you to benefit from the lower interest rates and have a lower monthly payment.
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