How these Loans Work
Home Equity Loan, HELOC, Cash out Refinance.
You are a homeowner and want to get your home improvement project going. You want your dream kitchen or bath, a new back porch, your landscaping overhauled. Or, you may be in a situation where you need liquidity in order to fund your children’s college education or you want to control debt through consolidation. At this juncture you are forced to weigh your options on which mortgage product will best fulfil your objectives. Will it be a Home Equity Loan where you make fixed payments for a fixed period of time, or will it be a Home Equity Line of Credit (HELOC) which is a revolving line of credit, much like a credit card where you can pay the minimum based on how much you draw from the account, leaving some money never utilized. Maybe the best option is to do a cash-out refinance, the rates seem more attractive than the mortgage you are presently carrying and you want to take advantage of achieving reducing your mortgage payment as well as getting that brand new kitchen.
Whether you decide to refinance, completely paying off all existing loans with a cheaper one, get a HELOC or Home Equity Loan, your objective of getting cash out of your property avoids tapping into savings or depleting your retirement or investment accounts.
The main consideration when deciding which option works best for you will center upon the cost of the loan and potential cost savings. A Home Equity Line of Credit (HELOC) and Home Equity Loan requires the lender to enter into a subordination agreement with existing lienholders, basically agreeing to allow the existing lien holders to be paid in full first as a priority in the event a borrower defaults and foreclosure or short-sale arises. As a result of this potential risk, these loan products are priced at higher interest rates in order to justify the risk of investing in such products and in order for lenders to attract investors.