If you need extra cash, you have several differentoptions, but two of the most popular choices are a personal loan or a home equity loan. Wondering which type of loan is the best for you? Then, keep reading to learn more about the pros, cons, and differences of these loans.
Personal Loans Versus Home Equity Loans
Sometimes called a signature loan, a personal loan is a loan that you take out directly from a bank or credit union. Generally, these loans are not secured by collateral, and they are set up as installment loans which means that you pay a set amount every month for the life of the loan.
In contrast, a home equity loan is secured by the equity in your home. Because these loans have collateral, they are often easier to obtain, and you may be able to get a larger loan than you would if you simply opted for a personal loan.
Types of Home Equity Loans
There are a few different types of home equity loans including the following:
- Cash Out Refinance Loan
- Home Equity Loan
- Home Equity Line of Credit
The right loan for you varies based on your situation and on your financial goals. Keep reading to learn about the differences between these types of loans.
Cash Out Refinance Loan
With a cash out refinance loan, you refinance your entire mortgage, but you get the amount of your equity in cash. To explain, imagine your home is worth $400,000 and you owe $250,000 on your mortgage. You have $150,000 in equity. When you decide to refinance, you take out a new mortgage for $300,000. You use $250,000 to pay off your existing mortgage. Then, you have the remaining $50,000 to spend, and you also still have $100,000 equity in your home.
With this option, you may also be able to lower your interest rate, change the term on your loan, or make other changes to your mortgage. The payments are just like a traditional mortgage. You make monthly payments for the lifetime of the loan, and as long as you get a fixed rate mortgage, your payments stay the same amount.
In contrast, a HELOC is a line of credit, and it’s similar to a credit card. To continue with the above example, imagine you have a $400,000 home and you only owe $250,000. A lender may offer you a home equity loan worth up to $150,000. This works like a credit card. You don’t have to spend anything, but you can spend whatever you need. Then, every month, you can make a minimum payment, or you can pay off the whole loan. When you pay off the loan, you can also decide to spend the funds again.
Talk with your lender to see how you can access the funds. Sometimes, people get paper checks linked to their HELOC, and in other cases, they may have a debit card or other options. With a HELOC, the interest rate tends to fluctuate.
Do you need extra money for school, paying down debts, home renovations, or anything else? Then, you may want to put your home equity to work. To learn about your options or to submit an application, contact us at BrightPathBrilliant Mortgage Solutions today.