Tag Archive for: home equity loan

Cash-Out Refinance: Avoid the $250,000 Blunder Most People Make

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Are you thinking about a cash-out refinance? While it might seem like a great idea to free up some cash each month, it creates further financial strain in the future. Therefore, before you jump in, let’s look at the numbers in order to see how this decision could cost you a whopping $250,000 over time. Let’s begin by looking at the average debt provided by Dave Ramsey. 

What is a Cash-Out Refinance?

To clarify, a cash-out refinance allows you to take out a new mortgage for more than you currently owe, as well as pocket the difference. It’s tempting if you’re looking for some extra cash or want to consolidate debt. However, in today’s market, with interest rates climbing, you might be setting yourself up for a costly surprise.

Cash-Out Refinance
New Loan Interest Rate Monthly Payment New Total (Current Payment $2,669 – Cash-Out Refinance $1,962)
New Mortgage Balance $295,000 7% $1,962 $707 (Monthly Relief)

Cost of Cash-Out Refinance
Monthly Payment Remaining Number of Payments Cost Over Loan Life Additional Money Out of Your Pocket!

 (Refinance Cost $706,550 – Total Cost Previously $454,591 
$1,962 360 $706,550 $251,959

What is a Home Equity Loan?

A Home Equity Loan, on the other hand, is a type of loan where you borrow against the equity you’ve built up in your home. To put it another way, it’s a second mortgage with a fixed interest rate, a set repayment term, as well as consistent monthly payments. Unlike a HELOC, which acts like a credit line, a Home Equity Loan gives you a lump sum upfront that you repay over time. Therefore, it is a stable option for consolidating debt or financing big expenses.

Home Equity Loan
New Loan Interest Rate Home Equity Loan Payment  + Mortgage New Total (Current Payments $2,669 – Mortgage with HEL $1,959)

(Credit cards and auto loan paid off)
Home Equity Loan  $57,500 9% $793 + $1,166 = $1,959 $710 (Monthly Relief)

Cost of Home Equity Loan
Monthly Payment Remaining Number of Payments Cost Over Loan Life + Mortgage Additional Money Out of Your Pocket!

(Home Equity Loan Cost  $461,249 – Total Cost Previously $454,591 
$793 105 $83,287 + $377,962 =

$461,249

 $6,658

Monthly Payment Relief: What Does It Really Cost?

Sure, both options give you that monthly payment relief you’re looking for, however, only one of them doesn’t mortgage your future. Therefore, by choosing the home equity loan over the cash-out refinance, you will not only save big now, but in the long run as well. 

Out of Pocket Difference Between the Two Options 
Cash Out Refinance $706,550 $245,301
Home Equity Loan $461,249

Bonus: Short-Term Impact

Some people say they won’t keep their mortgage for 30 years. However, the financial impact of a cash-out refinance can be seen after just one year! 

BONUS: Cash Out Refinance: Cost By Year 
Year Cost 
First Year $12,975
Third Year $26,987
Fifth Year $42,894
Tenth Year $80,679 + $11,898 = $92,577

Your Best Option in Today’s Market

In today’s market, a home equity loan is often the better choice. It not only provides the monthly relief you need, but it also doesn’t cost you a fortune in the long run. Remember, it’s not just about getting by today, it’s about protecting your future, too. 

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Cash Out Refinance: Good or Bad Idea in Today’s Market?

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Cash Out Refinance: Good or Bad Idea in Today’s Market?

Are you thinking about a cash out refinance and wondering whether or not it’s a good idea in today’s market? While many people see ads promising extra cash and lower monthly payments, it’s important to consider whether or not it’s the best choice for you. On the one hand, a cash out refinance can provide immediate funds for various needs. However, on the other hand, it can also come with significant risks, as well as additional costs. Therefore, it’s crucial to weigh the pros and cons before making a decision. So, let’s dive in and examine the details.

What is a Cash Out Refinance?

First and foremost, what is a cash out refinance? A cash out refinance lets you replace your current mortgage with a new one. To clarify, the new mortgage will be for more than what you currently owe, because you are taking cash out of the equity. For example, if you owe $200,000 on your home and get a new loan for $250,000, you will be getting $50,000 in cash.

The Appeal

  • Extra Cash: You can use the extra money for anything that you need.
  • Debt Consolidation: Combine high-interest debts into one lower-interest payment.
  • Home Improvements: Increase your home’s value with updates.

The Risks

  • Higher Interest Rates: Interest rates are higher than they used to be. Therefore, if you refinance now, you could end up with a much higher rate. This means your monthly payments could as a result be bigger as well.
  • Cost Over Time: Refinancing costs money. Not only are there closing costs, which can add up fast, but you might end up paying more over the life of the loan as well. Even if your monthly payment goes down, the total amount you pay could be a lot more.

Are there Better Alternatives?

So, what should you do instead? A home equity loan is a great option. It not only allows you to keep your current mortgage, but it also adds a second loan. Therefore, by using the equity in your home, it will not change the terms of your current mortgage. Another option is a Home Equity Line of Credit (HELOC), which works like a credit card. To clarify, a HELCO allows you to borrow what you need when you need it, and only pay interest on what you borrow. Both options provide the cash you need, while protecting your financial future.

  • Home Equity Loan: This allows you to keep your current mortgage and add a second loan. The interest rate on the home equity loan is fixed, so your payments stay the same.

  • Home Equity Line of Credit (HELOC): A HELOC works like a credit card. The interest rate can vary, but you only pay interest on what you borrow.

Cash Out Refinance vs. Home Equity Loan

Cash Out Refinance Home Equity Loan
Interest Rate Usually higher in today’s market Typically lower than cash out refinance
Monthly Payments New payments based on higher loan amount and interest rate Fixed payments on a second loan
Loan Term Extends mortgage term to 30 years Separate term, usually 5-15 years
Closing Costs High closing costs (2-5% of loan amount) Lower closing costs compared to cash out refinance
Access to Funds Lump sum received at closing Lump sum received at closing
Impact on Existing Mortgage Replaces existing mortgage with a new one Keeps existing mortgage intact
Total Cost Over Time Potentially higher due to interest over a longer term Generally lower total cost
Risk of Losing Home Higher, as you’re resetting your mortgage Lower, as your primary mortgage remains unaffected

Example: Jack vs. Jill

Jack (Cash Out Refinance) Jill (Home Equity Loan)
New Loan Amount $295,000 $90,000
Monthly Payment $2,000 $2,000 (mortgage + new loan)
Total Payment Over Loan Term $720,000 $476,000
Additional Cost Over Existing Debt $244,000 Minimal, as it adds to the existing debt separately

This comparison shows the financial impact as well as the potential risks of each option. More importantly, by considering these factors, you can make a more informed decision that aligns with your financial goals.

Conclusion

In today’s market, a cash out refinance might seem tempting, however it’s often a costly mistake. Higher interest rates as well as long-term costs can outweigh the short-term benefits. Instead, consider a home equity loan or a HELOC. Both of these options can give you the cash you need without risking your financial future. Most importantly, remember to think long-term and choose the best option for your situation. Stay smart with debt!

Contact us today to learn more about your options in order to determine which path would be best for you!

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What is a 2nd Mortgage and/or Home Equity Loan?

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When you’re exploring ways to tap into the value of your home, a 2nd mortgage or home equity loan might come to mind. First and foremost, it’s important to understand what these terms mean. To clarify, both options allow you to borrow against the equity in your home. However, there are key differences between the two. In the next sections, we’ll dive deeper into the pros, as well as the cons of each, so you can determine which might be the best fit for your needs.

What is a 2nd Mortgage?

A second mortgage is a loan you can get using your home as collateral. It’s called a “second” mortgage because you already have a first mortgage. Here’s how it works:

  • Collateral: Your home secures the loan.
  • Loan Amount: Based on the equity you have in your home.
  • Interest Rate: Usually higher than your first mortgage.
  • Payment: You’ll have two monthly payments – one for your first mortgage, as well as one for the second mortgage.

What is Home Equity?

Home equity is the difference between what your home is worth and what you owe on your mortgage. For example:

  • Home Value: $300,000
  • Mortgage Owed: $200,000
  • Home Equity: $100,000

Therefore, you can borrow against the equity in your home.

What is a Home Equity Loan?

A home equity loan is a type of second mortgage. It allows you to borrow a lump sum of money based on your home’s equity. Here’s what you need to know:

  • Lump Sum: You get the money all at once.
  • Fixed Rate: The interest rate is usually fixed, therefore it won’t change.
  • Repayment: You pay back the loan in fixed monthly payments over a set period.

Why Use a 2nd Mortgage or Home Equity Loan?

There are several reasons why you might consider these loans:

  • Home Improvements: Make upgrades or repairs to your home.
  • Debt Consolidation: Pay off high-interest debt, like credit cards.
  • Emergency Expenses: Cover unexpected costs, such as medical bills.
  • Education: Pay for college tuition or other educational expenses.

Benefits of 2nd Mortgages and Home Equity Loans

These loans come with some advantages:

  • Access to Funds: Tap into your home’s value.
  • Fixed Interest Rates: Predictable payments.
  • Potential Tax Benefits: Interest may be tax-deductible (check with a tax advisor).

Things to Consider

Before taking out a second mortgage or home equity loan, keep these points in mind:

  • Risk: Your home is collateral. If you can’t repay, you could lose your home.
  • Interest Rates: Higher than first mortgages.
  • Debt Load: You’re adding more debt to your finances.

Conclusion

Second mortgages and home equity loans can be helpful. They allow you to use your home’s equity for various needs. But, it’s important to understand the risks and make sure it’s the right choice for you.

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How a HELOC Works

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Today we are going to discuss how a HELOC works. First and foremost, a Home Equity Line of Credit (HELOC) is like having a credit card tied to your house. Let’s break it down!

First, What is a HELOC?

To say it another way, a HELOC is a loan where your home acts as the collateral. Therefore, you borrow money against the equity you have built in your home.

Second, How Does It Work?

  1. Equity Check: First, you need equity in your home. To clarify, equity is the difference between what your home is worth and what you owe on your mortgage.
  2. Apply for a HELOC: You apply for a HELOC with a lender. They not only look at your home’s value, but your mortgage balance, and your credit score as well.
  3. Get Approved: Once approved, you get a credit limit. However, this is the maximum amount you can borrow.
  4. Draw Period: More importantly, you can borrow from your HELOC during the draw period, usually 5-10 years. During this time you only pay interest on what you borrow.
  5. Repayment Period: After the draw period, you enter the repayment period, usually 10-20 years. You pay back what you borrowed plus interest.

Third, Why Use a HELOC?

  • Flexibility: Borrow what you need, when you need it.
  • Lower Interest Rates: HELOCs often have lower interest rates than credit cards.
  • Tax Benefits: Interest may be tax-deductible.

Finally, Things to Remember

  • Variable Interest Rates: HELOCs usually have variable rates, which means they can go up or down.
  • Fees: There can be fees for setting up a HELOC, annual fees, and closing costs.
  • Risk: If you can’t pay back the HELOC, you risk losing your home.

HELOC vs. Home Equity Loan

  • HELOC: Works like a credit card with a limit you can borrow against.
  • Home Equity Loan: You get a lump sum of money and repay it over a fixed term.

Example

Imagine you have a home worth $200,000 and owe $100,000 on your mortgage. Your equity is $100,000. A lender might offer you a HELOC with a limit of $80,000. You can borrow against this limit as needed, pay it back, and borrow again.

Final Thoughts

A HELOC can be a great tool for homeowners needing extra funds. It offers both flexibility and lower rates, however, it’s important to understand the risks. Always read the fine print and consider talking to a financial advisor.

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