The mortgage process has long been described as one of the most stressful borrowing processes, and with good reason. Your home is a valuable piece of property and securing financing to make the purchase can be quite detailed, as the lender is evaluating your credit, income, and asset qualifications in order to make a decision. As you continue to build equity up in your home as the mortgage balance decreases with every payment and the home value (hopefully) increases, you may be wondering which is the best mortgage option in order to pull out funds to take a vacation, plan a wedding, or fund a long-overdue home improvement project instead of putting on a credit card.
Refinancing Is an Option
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As long as you have equity in your home, you may be able to complete a cash-out refinance of your current mortgage, which lenders typically will allow up to 80% loan-to-value. For example, if you have a $200,000 house (confirmed with an appraisal), and owe $150,000 (75% LTV), you would be able to borrow up to 5% or $10,000. Keep in mind this will come with a full application process, providing pages of income & asset documentation as you completed the first time around, in addition, paying closing costs to the lender and title company.
Taking Out a 2nd Mortgage
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If you are looking for a more streamlined process to take out equity in your home, a second mortgage may be an option with either a home equity loan or line of credit (HELOC). Here you take out an entirely new loan, borrowing only the equity you are looking to secure. For example, keeping the 80% rule in mind with the earlier example, you could borrow $10,000 without having to go through the entire refinance process, though still having to qualify based on credit, income, and any asset requirements. You can have fixed monthly payments paying back the full balance with a home equity loan, or with a line of credit, being approved for the $10,000 and borrow as-needed and paying back the balance, instead of the full line amount.
Which Loan Makes Sense?
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While certainly each borrower’s financial situation is different, it may be best to consult with a mortgage professional, or an online resource like Home Equity Wiz, before deciding on which loan makes the most sense for your need. With a cash-out refinance, provided your credit, income, and assets grant you the most favorable terms on the market, you can receive the funds at closing and build into your loan amount with a rate lower than a credit card or equity loan over the life of the loan. Keep in mind though, since it is a new loan, there will be a vigorous approval process and closing costs, that you will have to weigh how long you plan on staying in the property to see if the extra fees are worth it. With a home equity loan, you can likely see still rates lower than a credit card, with lower fees than a refinance, but the terms to be paid up to 10-15 years, instead of a 30-year mortgage, so you may notice a higher payment instead of being spread out over more years.
