A Guide to More Money: Mortgage Edition (HELOC, Refinance, Cash-Out)

Who wouldn’t like a few extra bucks to make improvements, put a fresh coat of paint on the outside, or buy a new living room set? All of these choices could potentially boost the value of your property when it comes time to sell and move on, but how in the world can any of us afford it?

Lucky thing we have choices!

Quiz time! As you read the summary notes for HELOC, Refinance, and Cash-Out, there’s a common theme that ties them all together – see if you can find it.

HELOC

A Home Equity Line of Credit (HELOC) is a type of home equity financing that lets you borrow against the value of your home. With a HELOC, any upgrades you’ve made or the value of your property going up is a great thing!

A HELOC (Home Equity Line of Credit) is processed much like a second loan – you give your financer the typical documents needed for a loan – W2s or bank statements if you are self-employed, and the financer will return with a proposed loan package including amounts and terms that you can review and accept.

With most HELOCs, you are given the entire amount up front through a direct deposit and can pay down the interest over time to gain access to additional cash for spending. At the end of a set period, ten years usually, you then are no longer able to access any more cash for spending and begin paying off the amount through a set period.

Most of the time, the money from a HELOC is used to pay for big bills or to pay off other loans with higher interest rates, like credit cards, but the money can be put toward any need in your life.

Most customers take on a HELOC for…

• Consolidating debt
• Paying off student loans
• Making home improvements and renovations
• Taking an extended vacation
• Paying for major expenses, like weddings
• Closing out high-interest cars, credit cards, or personal loans

Thinking about a HELOC with Newrez? Check out some more facts in our Knowledge Hub: Home Equity Line of Credit (HELOC) - Things You Need To Know | Newrez

Refinance

Looking at your current mortgage arrangement you may find yourself in the situation many other borrowers face as well – the current market carries better rates, your credit score has improved, or you have increased equity in your home over time – in any case, you now stand a chance at getting a better rate than when you initially signed your mortgage loan, if it was fixed-rate or was locked into a fixed rate in the past from an adjustable rate.

With a refinance you are able to change your mortgage loan’s rates and terms by essentially refreshing the loan. By taking advantage of refreshed terms and rates you could save on your monthly mortgage payment, making room to use the funds previously going toward your monthly mortgage payment for other purposes!

Most customers take on a Refinance for…

• Consolidating debt
• Paying off student loans
• Making home improvements and renovations
• Taking an extended vacation
• Paying for major expenses, like weddings
• Closing out high-interest cars, credit cards, or personal loans

Thinking a refinance may be right for you? Check out some frequently asked questions at our Knowledge Hub here: Cash-Out Refinance FAQs | Newrez

Cash-Out

A cash-out refinance is a type of loan that lets a borrower "cash in" the value of their home in exchange for cash, but how does it work?

When you finance a home with a mortgage, part of your monthly payment goes toward paying off the principal amount (the amount of money you originally borrowed without interest) and the other portion goes toward paying the interest on the loan – the interest may be variable or set, depending on your loan type, variable or fixed-rate.

With each monthly payment, you add to the equity, you have in your home, which means that your investment and wealth grow over time. Once you've turned your home equity into cash, that money is yours to spend, invest, or save in any way you like.

Most customers take on a Cash-Out Refinance for…

• Consolidating debt
• Paying off student loans
• Making home improvements and renovations
• Taking an extended vacation
• Paying for major expenses, like weddings
• Closing out high-interest cars, credit cards, or personal loans

Weighing a cash-out through Newrez? We’ve put together a blog post on the five potential benefits here in our Knowledge Hub: 5 Benefits of a Cash-Out Home Refinance | Newrez

Cash-In-Hand

Did you catch the common thread tying all three together?

Any of them, HELOCs, Refinances, and Cash-Outs, can be used to get cash in hand for major expenses or life’s little ups and downs – any choice takes the equity you’ve put into your home so far and puts it back to work for you.

It can be a great reminder that a home loan is an investment that can work for you over time – it isn’t just a black hole you send money to in order to live in your home.

Paying for College

Getting your hands on some extra funding to send yourself or your child to higher education sounds like a great idea, right? Well, of course, any investment in your future is a good one! However, there are pros and cons of financing this next step in your life through a refinance, cash-out, or HELOC.

Pros:

• A cash-out refinance means you’ll get money in hand to use however you want – there are generally no rules on how the money can be spent. This will free you up to pay tuition, transportation, books… The list is limitless.

Cons:

• When you fill out your Free Application for Federal Student Aid (FAFSA), the lump sum you get from your refinance will be added to your Expected Family Contribution. So, having more money in the bank could mean getting less money when it comes to federal student loan aid.
• If you refinance, you get a new loan with different terms, the former terms and rate of the mortgage before no longer matter. This could make your mortgage last longer and could also make the total cost of your loan go up over time.

Financing a Home Addition or Renovation

People often use the funds from refinancing to pay for home improvement projects. This is especially true when mortgage rates are low because other types of traditional credit tend to have higher interest rates – it makes sense to pay less over time.

Pros:

• If your refinancing lets you cash out enough money, you may be able to pay for all or part of your renovation without putting a strain on your regular budget.
• The value of your home may go up if you do home improvements that have a high average return on investment like redoing a kitchen or bathroom with new fixtures and appliances. So, if you choose the right renovation, you might be able to use equity to build more equity for a potential future HELOC.

Cons:

• While you may be able to benefit from a lower interest rate with a HELOC or refinance, some up-front costs like closing and service fees can be higher than traditional home improvement loans, driving up the total cost.

Consolidating High-Interest Credit Card Debt

Got a few credit card bills that could be paid down to save on interest?

Pros:

• Consolidating credit card debt with money from a cash-out refinance could mean paying off high-debt payments like credit cards, leading to serious savings in the long-run.

Cons:

• Consolidating credit card debt with a cash-out refinance moves the debt from a higher interest rate to a lower one, but it doesn't get rid of the debt. It may only be a short-term fix if you don't also change the way you spend.

More Money in Your Pocket…

Talk about a lot of choices, right?

The great part about using the above programs over a credit card is that you often can gain access to a larger lump sum of funds to make the changes you want (and maybe plus some) without the high APR percentage and yearly fees found on most big-box credit cards.

If you're ready to get on the path to more money, it's time to meet with one of our loan consultants. After we gain an understanding of your financial picture, including your history and goals, we'll get you aligned with the right financing plan for you! What're you waiting for?