Should I Get a Personal Loan or Refinance My Mortgage
With interest rates at all-time lows, you may be thinking now is the right time to take out a loan. If you’re a homeowner, here are two options to consider. You can tap into your home equity with a cash-out refinance or get some money quickly via a personal loan. Which is right for you? Exploring some key differences between these two loan types can help you decide. Let’s begin with a short definition of each.
Personal loans, a type of consumer loan, are offered to individuals by banks, credit unions, and other lenders. In most cases, collateral isn’t required to secure the loan. You can expect to pay a fixed amount each month for a set loan term. And the money you receive from a personal loan can generally be used for just about any purpose.
Cash-Out Mortgage Refinance
A cash-out mortgage refinance is a new home loan where your property is used as collateral. The loan amount will be large enough to pay off your existing mortgage plus provide you with a certain amount of cash. You will be qualified based on factors such as your income, employment, debt, property value, and credit history. Like a personal loan, you will make monthly payments with no restrictions on how you can use the money.
Now let’s dive a little deeper and review some comparison points that can help you determine which loan might work best for you.
Collateral and Home Equity
In most cases, to qualify for a cash-out refinance loan, you must have equity in your home. Generally, your lender will require you to keep 20% equity, which limits your new loan amount to 80% of your home’s appraised value. In contrast, most personal loans are unsecured. You don’t have to worry about offering collateral or being limited by the amount of equity you have in your home.
Generally, a home loan will offer a lower interest rate than a personal loan. That’s because it is secured by your property. However, personal loans typically offer lower interest rates than most credit cards with non-introductory rates. Both cash-out refinances and personal loans are commonly used to pay off high-interest debt. The rate you receive on either is affected by your credit score, income, and the loan amount.
Speed of Process
The approval process for a home loan typically involves an appraisal, detailed underwriting, and other requirements that are time-consuming. However, the approval process for a personal loan is generally more streamlined and can usually be done much faster. In general, a personal loan offers access to cash in days while a home loan will take weeks.
Both loan types offer a wide range of loan amounts, but personal loans typically offer lower amounts than home loans. However, sometimes a cash-out refinance can secure a lower interest rate and save you money in the long run. If that’s your situation, you may still want to consider a refinance, regardless of the amount of cash you’re seeking.
The fees associated with either type of loan will depend on the lender you choose. However, a range of 0% to 5% is common for personal loans and a range of .25% to 3% of the loan amount is common for a home loan. Most of the fees charged for a mortgage are to pay for required third party services. This includes escrow, title insurance, and an appraisal. The lender fee, sometimes referred to as origination fee, processing fee, or underwriting fee, is charged by the originator of the loan.
Based on typical fee ranges, when making a dollar-for-dollar comparison, you can generally expect to pay more in fees for a home loan. That’s because the fee percentage is applied to the entire home loan amount and not just the cash-out amount. However, this can vary depending on the cash-out amount, home loan amount, and the interest rates offered.
Personal loans have a shorter repayment period, commonly from one to five years, with a few lenders going as high as seven years. You’ll have a longer repayment period with a cash-out refinance. The most common home loan terms are 15, 20, and 30 years with a few lenders offering 10-year terms.
A cash-out refinance might offer some tax benefits, based on how you use the money. In some situations, the interest on the loan and any costs associated with buying down the interest rate could be deductible. It can depend on whether the cash you received was used for home improvements that increased the value of your home. You can reach out to a tax consultant to find out if any tax benefits would apply to your situation.
Personal Loans vs Cash-Out Refinances
|Personal Loans||Cash-Out Refinances|
|Unlimited Use of Funds|
|Flexible Loan Amount|
|Longer Repayment Period|
|Lower Loan Fees|
|Lower Interest Rate|
|No Collateral Required|
|Potential Tax Benefits|
As a homeowner, you have the luxury of considering two loan options when you want funds for your personal use. A side-by-side comparison is helpful in determining which option is right for you. Both personal loans and cash-out refinances offer flexible loan amounts without restrictions on the use of funds. Potential advantages to personal loans are speed of processing, lower loan fees, and no collateral requirement. On the other hand, a cash-out refinance usually offers a lower interest rate, a longer repayment period, and potential tax benefits.
Should I Get a Personal Loan or Refinance My Mortgage
This blog post was published by Axos Editorial Team on October 13, 2020 and last updated on October 13, 2020