When you buy a house, odds are you’re using a loan to do so. This means that as you pay down your mortgage, you increase the equity you have in the property you’ve bought. One of the biggest benefits of having equity is the fact that you can take out another loan against it despite still having a mortgage to pay. This can be incredibly helpful if you’re in need of extra money. However, it’s important to understand what your options are. There are several ways to take out a loan against your home equity — two of the most popular ways are through refinancing and a home equity loan.

If you need money for another reason, like to invest in home improvements that will increase the value of your home, then one option is to take out a cash-out refinance. A cash-out refinance allows you to take out a loan that’s bigger than what the balance on your first mortgage is. You can then pay off your first mortgage and still have cash left over to use however you need. How much you can take out will depend on how much equity you have in your home.

One thing to keep in mind when refinancing is that you will have to pay for closing costs again. This means that if you’re trying to replace your initial mortgage, you should calculate how much it will actually cost to do so versus how much you’ll save to ensure that it’s the right option for you.

What is a Home Equity Loan?

A home equity loan has more in common with a personal loan than it does with a mortgage refinance. There are two main types of home equity loans: traditional home equity loans and HELOC (home equity line of credit). A traditional home equity loan is often known as a second mortgage. This is because you’re taking out a second loan against the equity you have in your property. You’ll have to make payments on both the home equity loan and your first mortgage. If you default, the lender of the mortgage will collect any proceeds from the foreclosure first. Because of this, the interest rates on home equity loans tend to be much higher.

An HELOC differs in that instead of getting a lump sum of money (as in a traditional home equity loan), you will be given a line of credit. You will likely have to withdraw a set amount; however, you will only have to make payments and pay interest on the money you withdraw, not the entire amount of the credit line that was approved. HELOC loans tend to make more sense if you need money over a period of time, such as for tuition or for a series of renovations that you don’t plan on tackling all at once.

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Refinancing your original mortgage and taking out a home equity loan are both effective options depending on what your needs are. For more information about your options, contact us at Amberwood Mortgage today.