Cash Out Home Loans

Is a cash-out refinance right for you?

If you’re interested in borrowing against your home’s available equity to pay for other expenses, you have choices. One option would be to Glossary Term: refinance Information Panel and get cash out. Another option would be to take out a Glossary Term: home equity loan Information Panel or Glossary Term: line of credit Information Panel. Here are some of the key differences between a Glossary Term: cash-out refinance Information Panel and a home equity loan or a home equity line of credit (HELOC).

Cash-out refinance

A refinance transaction in which the new loan amount exceeds the total of the principal balance of the existing first mortgage and any secondary mortgages or liens, together with closing costs and points for the new loan. This excess is usually given to the borrower in cash and can often be used for debt consolidation, home improvement, or any other purpose. The borrower effectively borrows against the home’s available equity.

Loan terms

Cash-out refinance: pays off your existing first Glossary Term: mortgage Information Panel. This results in a new mortgage loan which may have different Glossary Term: term Information Panels than your original loan (meaning you may have a different type of loan, a different Glossary Term: interest rate Information Panel as well as a longer or shorter time period for paying off your loan). It will result in a new payment Glossary Term: amortization Information Panel schedule, which shows the Glossary Term: monthly payments Information Panel you’d need to make in order to pay off the mortgage Glossary Term: principal Information Panel and Glossary Term: interest Information Panel by the end of the Glossary Term: loan term Information Panel.

Home equity loan or line of credit: is usually taken out in addition to your existing first mortgage; rather than replacing it, it will have its own term and repayment schedule, separate from your first mortgage, and is considered a second mortgage. However, if your house is completely paid for and you have no mortgage, some lenders allow you to open a home equity line of credit in first lien position, meaning the home equity line will be your first mortgage.

How you receive your funds

Cash-out refinance: you receive a lump sum when you close your refinance. The loan proceeds are first used to pay off your existing mortgage(s), including closing costs and prepaids, and any remaining funds are yours to use.

Home equity loan: you receive a lump sum when your loan closes.

Home equity line of credit: you’ll receive access to a line of credit that you can draw from as needed, up to your credit limit. The draw period is usually 10 years. Following the draw period, a repayment period begins, usually 15 years. During the repayment period, you will repay the remaining principal and interest and you may no longer draw funds from your line of credit.

Interest rates

Cash-out refinance: can typically offer a lower interest rate than a home equity loan. A Cash–out refinance is available on both a fixed rate or an adjustable rate mortgage. Your lender can provide information about fixed rate and adjustable rate mortgage options so you can decide which best fits your situation.

Home equity loans: are Glossary Term: fixed-rate loans Information Panel. Throughout the life of the loan, you’re protected from payment fluctuations as the interest rate remains fixed. Rates for home equity loans can often be higher than a cash-out refinance or home equity line of credit.

Home equity lines of credit: usually have a lower interest rate than a home equity loans or cash-out refinances. The interest rate is Glossary Term: variable Information Panel and changes with an Glossary Term: index Information Panel (typically The Wall Street Journal Prime Rate). Your interest rate will vary with changes in the index (meaning if the index increases or decreases, your rate will increase or decrease accordingly). Your lender may also offer you a fixed-rate loan option. Bank of America home equity lines of credit include this fixed-rate conversion option.  This would allow you to convert all or just a portion of the outstanding variable rate balance to a fixed rate loan.

Closing costs

Cash-out refinance: will incur Glossary Term: closing costs Information Panel similar to your original mortgage.

Home equity loans and lines of credit: usually have no, or relatively small, closing costs.
If you think that borrowing from your available home equity could be a good financial option for you, talk with your lender about cash-out refinancing, home equity loans, and home equity lines of credit. Based on your personal situation and financial needs, your lender can provide the information you need to help you choose the best option for your situation.

Closing costs are fees paid at or prior to the closing of your loan. They may include attorneys’ fees, as well as fees for preparing and filing a mortgage, and for taxes, title search, and insurance. They include the expenses incurred in obtaining the loan and in transferring the ownership of any collateral property from the seller to the buyer. Generally, closing costs are typically about 3% of the total loan amount. Also called settlement costs.

Index

When used in a mortgage note or credit agreement, a financial index is the measurement used to decide how much the annual percentage rate will change at the beginning of each adjustment period. Generally, the index plus or minus margin equals the new rate that will be charged, subject to any caps. Lenders use various financial index rates: London Interbank Offered Rate [(LIBOR and Treasury-Indexed ARMs (T-Bills)].

Mortgage

A legal document giving a lender a lien on real estate to secure repayment of a loan. Mortgage loans generally run from 10 to 30 years, after which the loan is required to be paid off. Also called deed of trust and/or security deed.

Amortization

The gradual reduction in the principal amount owed on a debt. During the earlier years, most of each payment is applied toward the interest owed. During the final years of the loan, payment amounts are applied almost exclusively to the remaining principal (unless there has been negative amortization).