Building equity is one of the best parts about owning your own home. The option to refinance the loan on a home that has accumulated equity is a financial advantage that means different things to different people. For some homeowners, a substantial amount of equity feels like having a large savings account. Others see refinancing as a way to pay off some of their debts sooner.
At the end of the day, the decision to refinance usually leads back to achieving your life goals. That's why it’s important to consider all of the available options so you can settle on the one that best suits your specific needs. Your licensed CrossCountry Mortgage loan officer can give you all the information you need, and the answers to two questions will influence your final choice.
Question 1: Cash-Out Refinance or a Home Equity Loan?
One primary objective of cash-out refinancing is to siphon off hard-earned equity and apply it to things that improve your quality of life. Among the most common usages are home improvements.
Homeowners who use the cash-out option for home upgrades treat equity like a bank or investment account they can draw from. After all, you put the money into the home, so why not put it to work? By refinancing and pulling a portion of the equity back in cash, you may be able to afford an amazing new bathroom, outdoor patio, or other home enhancements.
A well-planned cash-out refinance can leave your monthly mortgage payments where they are or even bring them a tad lower. Your lifestyle can actually improve and monthly bills aren't negatively affected.
Home equity loans can achieve quality of life goals as well, but they are likely to create an uptick in your monthly expenditures. The two common types are:
- HELOC: A home equity line of credit offers homeowners a predetermined borrowing limit. These generally allow people to borrow against the credit line for 5-10 years. The repayment terms can run 10 years or longer. This is very similar to having a second mortgage.
- Home Equity Loan: This standard type of loan sets repayment terms between 5-15 years in many cases. This is, in effect, a second mortgage.
When deciding which of these options could be a good fit for your situation, consider your monthly revenue comfort level against the value of paying off your home. A cash-flush homeowner may opt for a HELOC or home equity loan with an eye on paying off the property. But quality of life improvements can also be possible by tapping into that home equity piggy bank and maintaining the monthly status quo.
Question 2: Shorten the Loan or Lower the Payments?
Many homeowners consider going the refinancing route when interest rates dip. Remember, the purpose of refinancing is not necessarily to get the lowest interest rate possible. The goal tends to be either shortening the life of the loan or lowering monthly payments to free up personal wealth.
Equity can play a powerful role in changing the length of your mortgage from 30 years to 15 years, a move that can be timed to coincide with your retirement or other life factors. Even a slightly higher monthly payment can help achieve long-term goals.
For individuals in need of funds immediately, a refi can quickly free up cash that could be used to tackle a variety of expenses: braces for the kids, a much-needed vacation, or even to help you pay off other debts you might have. You may have to extend the length of your loan a few years, but you can gain peace of mind knowing that today’s needs are being met.
Refinancing can reduce your monthly payment initially, but that doesn’t always mean it will save you money in the long run, as total finance charges may be higher over the life of the loan.* Fees and interest rates also need to be considered when calculating if your new mortgage will save you money over the entire life of the loan. A licensed loan officer will be able to help you decide if refinancing is right for you. We’ll help you calculate at which point you will break even and begin to save.
We’re Here to Help!
Throughout the refinancing process, it’s important to remember that you will likely be balancing one aspect of your financial portfolio against another. This is not a bad thing, because the point of any refinancing strategy is to successfully identify and meet specific life goals, which owning a home helps you do. Your licensed CrossCountry Mortgage loan officer can help you do those things as well, so start the conversation today and find out which refinancing option is right for you!
*Refinancing may result in higher total finance charges over the life of the loan.