When a person is seeking to better his financial situation, he may consider using his home as a means of freeing up some cash. There are several ways in which the person can do this. One of the most popular methods is to take out a home equity line of credit. Another is to refinance his home loan into a cash-out loan, in which he is loaned a sum of money. Both these tactics have advantages and disadvantages.
Refinance Advantages
Perhaps the main advantage of refinancing into another mortgage is that the new loan can take many different forms. A homeowner will often approach a number of different lenders and pick the loan offer that most suits her immediate financial needs. A cash-out refinancing may also allow the lump sum loan to be repaid at a fixed rate of interest, so the borrower will know exactly what she owes on the loan.
Refinance Disadvantages
The downside to refinancing, including cash-out refinancing, is that the process is expensive. A person who is refinancing will end up paying many of the same expensive fees that he paid when he took out his first home loan, fees that many not be applied for a home equity line of credit. In addition, cash-out loans offer only a single lump sum payment, as opposed to the flexibility of a line of credit.
Home Equity Line of Credit Advantages
A home equity line of credit, commonly referred to as a HELOC, allows a person to use the equity of her home as collateral on loans. It functions, in effect, like a credit card secured by a house. Like a credit card, a person can take out only as large a loan as she want. Also, because the loan is secured by collateral, interest rates are generally lower than those attached to credit cards.
HELOC Disadvantages
HELOCs are generally only available with variable interest rates attached to the loans. This means that the interest of the loan will go up and down depending on the direction of market interest rates. This can be somewhat riskier than a fixed-rate loan. If interest rates spike unexpectedly, a person can be left owing a large amount of interest. This can potentially lead to default and, in the worst cases, repossession of the house.
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