Alternatives to a Cash-Out Refinance

You need cash, but you aren’t sure you want to refinance your first mortgage. Is the cash-out refinance the only way to get the cash you need?

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Luckily, there are other ways you can get your hands on some cash. Some of the options may be more expensive than a cash-out refinance, but knowing all of your options can help you make the right decision.

Home Equity Loan

If you like your first mortgage’s interest rate or terms, you may want to leave well enough alone. We don’t blame you. Luckily, there is a way to tap into your home’s equity without touching your first mortgage. It’s called a home equity loan.

The home equity loan is a second mortgage on your home. It takes the equity you have in your home and converts it into cash. You receive the cash in one lump sum. You then have two mortgage payments to make each month. You can get a home equity loan from your current lender or a completely separate lender. It depends on your qualifying factors and what you need.

The home equity loan usually offers a fixed interest rate. This means you always know the amount of your payment and you pay the loan off in 10 – 20 years. The mortgage takes second lien position, which means if you default on your loan and go into foreclosure, the first mortgage lender will get paid first. Any remaining proceeds go to the second loan holder. This does mean it’s a higher risk for the home equity loan lender, so make sure you have good qualifying factors when you apply.

In most cases, you can borrow up to 85% of your home’s value in a home equity loan. The actual amount you can borrow will be the difference between 85% of your home’s current value and your current outstanding balance on your first mortgage.

Home Equity Line of Credit

The home equity line of credit is also a second mortgage on your property. This loan, however, doesn’t necessarily give you the funds in one lump sum. You can receive them that way if you want to, but you can also keep the funds in a checking account, withdrawing the funds as you see fit.

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The difference with the HELOC is that you only pay interest for the first ten years of the loan. You can choose to pay principal too, but all that is required are principal payments. You also only owe the interest on money you withdrew. For example, if you have a $10,000 line of credit but you only take out $1,000, you pay interest on the $1,000 only.

You can continue to use the funds in your HELOC for the first ten years that you have the loan. After that point, which is called the draw period, the loan goes into repayment status. At this point, you pay principal and interest payments for the next 20 years to pay the loan off in full. You cannot draw funds anymore at this point.

Something to watch on HELOC loans, though, is the interest rate. They are usually variable, which means you may not know your interest rate from one month to the next. This could add some unpredictability to your loan as you enter the repayment period.

Personal Loan

If you don’t want to touch your home’s equity, you can apply for a personal loan. These loans are unsecured. This means there’s no collateral to put up in case you don’t repay the loan. You can usually get a personal loan in a short amount of time compared to the 30 to 45 days it can take to get a mortgage.

You can use the proceeds of a personal loan however you see fit. Whether it’s to consolidate debt, fix up your home, or take a dream vacation, you can use the funds however you want. The difference with the personal loan is the interest rate and term. You’ll usually pay a much higher interest rate than you would on a mortgage because of the risk the lender takes. You’ll also pay the loan off in 5 years or less in most cases.

Sell Your Assets

One final alternative to a cash-out refinance is to sell assets. Whether you have a car you own that you no longer need, you have stocks and bonds, or you have antiques, they may all be worth money. You can sell the items on the secondary market and keep the profits.

One thing to watch out for when selling assets, though, is the capital gains tax. You may owe taxes on your profits, depending on the type of asset you sell and the amount of the profits you make. It’s best to consult with your tax advisor before selling assets so that you are aware of what you might face.

There are plenty of ways to get your hands on cash should you need it. Whether you tap into your home’s equity or you go another route and leave your home alone, you have options. Just make sure you explore all of them, including the cost now and over the entire life of the loan, should you take one. This way you can decide which options are right for you.

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Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.

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