When you’re looking to tap the equity in your home, you might be considering two popular solutions and potential options: home equity loans and cash-out refinancing.
Each of these financing options has its own unique processes, benefits, and drawbacks. Here, we’ll explore the distinctions between home equity loans and cash-out refinancing. Plus, we’ll share a more accessible option if you don’t qualify for financing.
Let’s dive right in, starting with home equity loans.
On this page:
- Understanding home equity loans
- Understanding cash-out refinancing
- Home equity loans and cash-out refinancing compared side-by-side
- Residential sale-leaseback: A great option if you don’t qualify for traditional financing options
Understanding Home Equity Loans
Home equity loans give you the option to borrow against the equity you have in your home. The size of the loan you can receive is based on the difference between the current market value of the home and the outstanding mortgage balance.
For example, if your home is worth $300,000 and you’ve made $100,000 in payments on it, you have $100,000 in equity. If you qualify for a home equity loan, lenders will often offer up to 80% of the equity you have. So, in this case, you’d be able to receive a home equity loan of about $80,000.
Home equity loans typically have fixed interest rates compared to the variable interest rates that are common among HELOCs.
Eligibility Requirements for Home Equity Loans
To get a home equity loan, you’ll usually need to meet specific eligibility criteria. Common eligibility requirements include things like having:
- A substantial equity stake in your property (typically at least 20%).
- A favorable credit score (usually 660 or higher)
- A consistent income
- A track record of making timely payments on your mortgage, credit cards, and other credit lines
- A low debt-to-income ratio (generally less than 43%) is commonly required.
If you don’t meet these requirements, jump down to learn more about a home equity solution with only one eligibility requirement: equity.
Advantages and Drawbacks of Home Equity Loans
Before we move on to cash-out refinancing, let’s review some of the benefits and drawbacks of home equity loans.
Advantages of Home Equity Loans
- Use your funds as you see fit: You can use the funds from a home equity loan to cover any of your financial needs, from home improvements and debt consolidation to education financing and medical bills.
- Low interest rates: Home equity loans often offer lower interest rates than many other borrowing options.
- Flexibility: You may be able to choose between fixed-rate and variable-rate loans based on your preferences and financial needs.
Drawbacks of Home Equity Loans
- Your home is on the line: Failing to repay your loan can lead to foreclosure, given your home’s role as collateral.
- Closing costs and fees: Home equity loans may involve additional costs, including closing fees, impacting the overall cost of borrowing.
- Variable-rate products can be unpredictable: In the current high-interest rate environment, the variable rates associated with certain home equity loans could make your monthly payments jump rapidly.
- Difficulty qualifying: Securing a home equity loan requires a good credit score, stable income, and a favorable loan-to-value ratio. Qualification standards may be stricter than other loan types, which can make it harder for you to access this form of financing.
Understanding Cash-Out Refinancing
Cash-out refinancing is where you secure a new mortgage that covers your existing mortgage and provides additional funds for discretionary use.
For example, let’s again say that your home is worth $300,000, and you’ve paid $100,000 on it. This means your outstanding mortgage balance is $200,000. With cash-out refinancing, you might get a new mortgage for $250,000, paying off your remaining mortgage balance, plus giving you an additional sum of $50,000 that can be used as you see fit.
Eligibility Requirements for Cash-Out Refinancing
The eligibility criteria for cash-out refinancing is generally similar to the criteria for a home equity loan. You’ll need to have:
- A credit score of 620 or higher in most cases
- A debt-to-income ratio of less than 43%
- A consistent income
- A loan-to-value ratio of less than 80%, meaning that the value of your loan value should be less than 80% of your home’s value.
If your credit score or income is making it hard for you to qualify for cash-out refinancing, jump to learn about a solution that only requires you to have equity in your home.
Advantages and Drawbacks of Cash-Out Refinancing
Before you decide that a cash-out refinance is right for you, make sure you understand the advantages and drawbacks of it.
Advantages of Cash-Out Refinancing
- Predictable payments: The fixed-rate nature of cash-out refinancing ensures a predictable monthly payment, helping you budget and plan your finances wisely.
- Potential tax deduction: If you use the cash for certain qualifying home improvements, the interest on your cash-out refinancing may qualify for tax deductions.
- Debt Consolidation: Using a cash-out refinance to settle high-interest debt can enhance your credit utilization ratio, potentially improving your credit score.
Drawbacks of Cash-Out Refinancing
- Higher mortgage balance: The overall mortgage balance increases with a cash-out refinance. If you’re already struggling with mortgage payments, this could be a risk for you.
- Higher interest rates: While lower than credit cards, cash-out refinances may carry slightly higher interest rates than standard rate-and-term refinances.
- Strict qualifying criteria: Obtaining approval for a cash-out refinance can be challenging. Without meeting lenders’ qualifying criteria, you may be unable to access a cash-out refinance.
Side by Side: Home Equity Loan vs. Cash-Out Refinancing
If you’re considering one of these financing options, take a look at how they stack up against each other.
Interest Rates and Repayment Terms
- Cash-Out Refinance: Cash-out refinances often boast lower interest rates than home equity loans, making them a popular choice for homeowners seeking to leverage their home equity.
- Home Equity Loan: Although home equity loans may carry slightly higher interest rates than cash-out refinances, they typically offer fixed or adjustable rates, providing repayment term flexibility based on what works best for you.
- Cash-Out Refinance: The interest on a cash-out refinance may be tax-deductible, mainly when funds are used for qualifying home improvements, potentially delivering a tax advantage.
- Home Equity Loan: Home equity loan interest is tax-deductible if utilized for similar home improvements, giving it a comparable tax benefit to cash-out refinances.
- Cash-Out Refinance: While cash-out refinances may feature lower interest rates, they can incur higher fees and closing costs than home equity loans.
- Home Equity Loan: Home equity loans typically entail lower closing costs, rendering them a more cost-effective choice when it comes to upfront costs.
Residential Sale-Leaseback: An Alternative to Financing
If you don’t qualify for traditional financing options like home equity loans or cash-out refinancing, it can feel like you’re out of options. Fortunately, you may qualify for a residential sale-leaseback. Here’s how it works:
Say you have debt that you want to pay off. You don’t have the money to do that right now, but you do have equity in your home. So, you sell your home to a real estate investment company and immediately start leasing it back. This gives you access to the equity in your home, allowing you to pay off your debt and stay in your home. Then, you continue leasing your home and eventually have the option to buy it back or move.
With SKYDAN’s residential sale-leaseback solution, you could have cash in hand in less than a month. That’s twice as fast as home equity loans and cash-out refinancing. Not only are sale leasebacks fast, but you may be able to access more cash than with traditional borrowing methods. This is because you’re tapping the equity in your home through a sale, not taking out a loan.
When Banks Say No, SKYDAN Says Yes
For too many homeowners, essential financing options are out of reach due to strict eligibility requirements. In this world where your options seem limited to expensive loans and additional debt, a residential sale leaseback program like SKYDAN’s can seem too good to be true.
It isn’t. SKYDAN is different because we’re a real estate investment company — not a lender or a bank. That means we don’t care about:
- Your credit score
- Your payment history
- Your debt-to-income ratio
- Your income
All you need to qualify for SKYDAN’s program is equity in your home.
But don’t take our word for it; check out our reviews to see why our customers call us “the real deal.” And if you’re ready for more good news, see if you qualify today!