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Home Equity Loan Basics

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Borrowing against your home's available equity

If you’re interested in borrowing against your home’s available equity to pay for other expenses, you have choices. One option would be to Glossary Term: refinance and get cash out. Another option would be to take out a Glossary Term: home equity line of credit. Here are some of the key differences between a Glossary Term: cash-out refinance and a home equity line of credit (HELOC):

Loan terms

Cash-out refinance: pays off your existing first Glossary Term: mortgage. This results in a new mortgage loan which may have different Glossary Term: terms than your original loan (meaning you may have a different type of loan, a different Glossary Term: interest rate as well as a longer or shorter time period for paying off your loan). It will result in a new payment Glossary Term: amortization schedule, which shows the monthly payments you'd need to make in order to pay off the mortgage Glossary Term: principal and interest by the end of the loan term.

Home equity line of credit: is usually taken out in addition to your existing first mortgage; rather than replacing it, it will have its own term and repayment schedule, separate from your first mortgage, and is considered a second mortgage. However, if your house is completely paid for and you have no mortgage, some lenders allow you to open a home equity line of credit in first lien position, meaning the home equity line will be your first mortgage.

How you receive your funds

Cash-out refinance: you receive a lump sum when you close your refinance. The loan proceeds are first used to pay off your existing mortgage(s), including closing costs and prepaids, and any remaining funds are yours to use.

Home equity line of credit (HELOC): you’ll withdraw from your available line of credit as needed, and make payments that include principal and interest, during your draw period—typically 10 years. After the draw period ends and the repayment period begins, you’re no longer able to withdraw your funds and you continue repayment. You have 20 years to repay the outstanding balance.

Interest rates

Cash-out refinance: available on both a fixed-rate or an adjustable-rate mortgage. Your lender can provide information about fixed-rate and adjustable-rate mortgage options so you can decide which best fits your situation.

Home equity line of credit (HELOC): interest rate is Glossary Term: variable and changes with an Glossary Term: index (typically The Wall Street Journal Prime Rate). Your interest rate will vary with changes in the index (meaning if the index increases or decreases, your rate will increase or decrease accordingly). Your lender may also offer you a fixed-rate loan option. Bank of America home equity lines of credit include this fixed-rate conversion option. This would allow you to convert all or just a portion of the outstanding variable rate balance to a fixed-rate loan.

Closing costs

Cash-out refinance: will incur Glossary Term: closing costs similar to your original mortgage.

Home equity lines of credit: usually have no, or relatively small, closing costs.

If you think that borrowing from your available home equity could be a good financial option for you, talk with your lender about cash-out refinancing and home equity lines of credit.Footnote 1 Based on your personal situation and financial needs, your lender can provide the information you need to help you choose the best option for your situation.