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Home Equity

Home Equity Loan Basics

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Home Equity or cash-out refinance?

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 loan or Glossary Term: line of credit. Here are some of the key differences between a Glossary Term: cash-out refinance and a home equity loan or 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 loan or 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 loan: you receive a lump sum when your loan closes.

Home equity line of credit (HELOC): You’ll withdraw 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: can typically offer a lower interest rate than a home equity loan. A Cash–out refinance is 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 loans: are Glossary Term: fixed-rate loans. Throughout the life of the loan, you’re protected from payment fluctuations as the interest rate remains fixed. Rates for home equity loans can often be higher than a cash-out refinance or home equity line of credit.

Home equity lines of credit (HELOC): To help you rebuild your available line of credit, your lender may require minimum monthly payments that include principal and interest. When you pay down additional principal each month, not only will you reduce your overall debt more quickly, you’ll save on the interest you pay over the life of the loan. Your lender may also offer you a Fixed-Rate Loan Option that allows you to convert all or just a portion of the outstanding variable-rate balance to a fixed rate. Bank of America standalone HELOCs require Glossary Term: Variable-rate monthly minimum payments that include principal and interest, as well as the choice to convert to a Fixed-Rate Loan Option.

Closing costs

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

Home equity loans and 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, home equity loans, and home equity lines of creditFootnote 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.