Are you thinking to change over the value present in your home with the cash money? Are you confused about whether you should go for the home equity or refinancing?
And probably also wondering what is the difference between Home equity and Refinance
If yes, then you have landed on the right page. Here we are going to discuss both the alternatives with their pros and cons. You can look over the features of both the options and then choose accordingly.
So, let’s begin
Prior to selecting an alternative, you should be well known what home equity and refinance basically are.
Home equity is best for the kind of borrowers who have a considerable amount of equity in their home. In order to calculate the complete value or the estimated amount of possession, you need to know the total equity value of your home.
From this aggregate sum value in your home, estimate the difference of all the liabilities or debts verified by your home and the present market value of your home. In this way, if your estimate value exceeds the value of your obligations, the leftover value would be your home equity value.
How to calculate your home equity (with example)
On the other hand, if the amount of difference will be a negative number, then you would not be eligible for getting advances.
Refinancing refers to a sort of loan through which you can renegotiate your first home loan with the other bigger home loan. Additionally, the exceeding amount of the difference can be converted into cash money. With the cash out refinance loan, there are various options that you can enable. These are:
- You can pay off your current home loan with the bigger home loan with the refiance second mortgage loan amount
- You can reschedule your current loan term or rate by merging both the loan amount together. The repayment time period can be extended in the refinance loan alternative.
- You can acquire a new term loan in the measure of the current home loan. Also, you can get the extra amount for the mortgaging purpose if needed with this option.
- You can get the lump sum amount of the loans or the borrowings that you have given to your debtors.
Before choosing the refinancing alternative, you need to keep the fact in mind that the moment you utilize the cash out refinances option to tap your home value, you will get bind with the totally new agreement.
In other words, the term of a loan, the fixed rate on the amount and the reimbursement plan for your new home loan will be totally different from the previous one. This loan usually offers a period of 30 years as the repayment term but it can slightly vary according to the various bank’s policies.
A rate of the interest can either picked to be fixed or variable according to the choice of the person. One more advantage can be gained but with the applied terms and conditions.
You can exploit the potential tax funds if you are eligible according to the conditions applied. This totally depends on the way you are utilizing your loan amount. For this, you can consult with your tax consultant for getting more details regarding the tax credit advantage.
Home Equity and Refinance – Similarities
Though there is a lot many differences between two of the loan alternatives, however, they have some similarities.
- RATE OF INTEREST
Both the alternatives are having commonly come up with one type of rate of interest. Home equity as well as refinancing, both accompany fixed interest rates. However, the variable or adjustable interest rate can be conceived in the cashout refinancing option.
- LOAN VALUE
In both the options, you will normally require an after exchange credit to value ratio of 90% or even less to get eligible for either of the two loan option.
- LUMP-SUM PAYOUT
On both the items, you can avail the lump-sum amount ( that means a full amount in single time)
Difference between Refinance and Home Equity loan
Both are different from each other in various aspects. Some of the major differences both have between each other are discussed as follows:
- LOAN AGREEMENTS
The first and foremost distinction between both of them is that in home equity alternative, a whole new agreement is made and each home value advance makes a separate or second home loan on your home equity. On the other hand, with the cash out refinance option, any present loan can be converted into another loan say bigger loan. This implies that a merger of both the loans is enabled in the refinancing alternative.
- FEES AND CLOSING COST
As mentioned earlier, in home equity loan a repayment period of 30 years can be taken at a fixed rate of interest. The other factor that is related to each of the credit alternatives is the fee and the closing expenses. If we talk about the cash out refinance loan option, the fees and the closing expenses could be higher due to the reason that loan is changing from one to another. However, in home equity loan there is no fees or closing expense and in case it is, then at a very nominal charge.
- RATE OF INTEREST
Home equity loans usually have a lesser rate of interest when compared with the refinancing interest rate. The reason behind it is that the home equity loans are verified by your property but there is no such catch in the refinance option. In other words, in case you default in repaying the amount of home equity loan, the lenders or the institution can claim on your home in consideration of the loan amount given.
Home equity loan or refinancing are the two paths that you can access to take another loan. The only requirement of these alternatives is the accumulated home equity that you should have in your home.
Both the options are similar and different simultaneously depending on some factors that have already mentioned earlier. With home equity, you can take another separate loan and with cash out refinance you can merge the loan into a bigger one.
In order to have equity in your home, it is essential that you have possession of your house for around 5 to 10 years. Also, there should be no default in making payments for the loan. If you meet the criteria successfully, then you can access any of the loan options.
The calculation of the home equity value can be done by estimating the amount needed for the loan and the amount you still owe on the current mortgage. The difference between both the amounts should be in positive numbers in order to get access to the loan option.
To make the calculation clear to you, an example has been given below.
Let’s say a person bought a house worth $100000. He had paid the down payment amount of 20% i.e. $20000 at the time of purchase and decided to pay the remaining amount of $80000 by taking the mortgage. Additionally, the owner of the house has a house equity value of $20000 and the market value of his home tends to be same over the following two years hence an amount of $5000 of the mortgage payment is applied to the principal amount.
Now, the home equity value in the home of the owner is $25000. In case the market value of the home in coming 2 years increases by $100000 and the constant $5000 mortgage amount is applicable to the principal value, the total home equity amount value will be $125000.
We hope that with this example, you will have a clear thought of how to calculate the home equity value accumulated in your home.
Now, there are various questions that have been frequently asked by the customers regarding the loan alternatives. Some of them are:
- Which loan is easier to qualify?
The cash-out refinance is comparatively easier to qualify as the current loan is getting merged with the other loan. On the other hand, in home equity, a new mortgage loan has been sanctioned which includes more formalities.
- Are the amounts of the loan taxable?
No, the amount you will get from either of the alternatives is not taxable as it is exempted from tax in form of capital gain that you will realize when you will sell your house in long term.
- When do we need to repay the tax amount?
In both the loan options, different time period has been allotted as the reimbursement term. In refinancing, the term of up to 30 years can be taken by the customer for repaying the amount. On the other hand, in case of a home equity loan, the time period of maximum of 15 years has been given for the repayment.