Are you considering refinancing to get some equity out? Are you more inclined to take out a home equity? Confused as to what both entail? To start, a cash out refinance is where you refinance your existing mortgage loan (a.k.a. 1st trust deed on your home) and take equity (cash) out at the same time. A home equity is where you take out a 2nd loan (a.k.a. 2nd trust deed on your home) in the form of equity (cash). There are pros and cons to each of these options. Your unique situation is going to dictate which is the best option for you.
If your first mortgage is at a high interest rate (at least 1.00% above current APR), then you might be interested in a cash out refinance. The great part about refinancing to a lower rate, is often times you can take out the additional equity you are looking for without raising your monthly payments significantly, if at all. Generally, you will want to keep your loan to value a maximum of 80% on a cash out refinance to avoid private mortgage insurance. Cash out refinances generally do cost more than a home equity loan as far as fees go, but your overall interest rate will be lower and you will still only have one payment/lien on your home.
If you already owe close to what your home is worth, the best bet for pulling equity out of your home is in the form of a home equity loan. Generally, lenders can offer a higher cumulative loan to value on a home equity and do not require private mortgage insurance. Closing costs involved in home equity loans are minimal. Some downfalls to home equity loans is they are offered in shorter terms (usually 10 -15 years) and often have higher interest rates than conventional mortgages. Watch out for loans with variable rates based on prime rate. Prime rate can fluctuate with the market and could leave you with a much higher payment on your 2nd lien than you anticipated.
The best place to start is at your local bank. Ask to speak to a loan officer and get a no obligation cost estimate on both options. Depending on the amount you currently owe and the estimated value of your home, the lender may be able to help you reach a conclusion quickly as to what is best for you. If you do choose to apply for either a refinance or home equity loan, make sure to read up about your rights. The best place to start is at www.hud.gov/respa. Under new January 1, 2010 RESPA regulation, lenders are required to disclose to the consumer the entire typical costs involved in your real estate loan request within 3 business days of application. They are then bound to the fees and terms they have disclosed. You are not bound to proceed with the loan simply by applying. Your home is a big investment, so make sure to stay educated so you can feel confident you are making the wisest choice.