Need Cash? Mortgage Cash-Out Refinance vs. Personal Loan

When most homeowners think about acquiring a large chunk of money – whether it’s to support an expanding business, tackle a home-improvement project, or to pay for a wedding – the first thing that usually comes to mind is to refinance and cash-out on a home or to get a personal loan. But just how do you choose between mortgage cash-out refinancing and a personal loan? We’ll help you figure it out.

Cash-Out Mortgage Refinancing

When taking out a home equity loan, you are essentially offering up a percentage of your home’s value as collateral. Lenders generally require you have at least 20% equity in your home before they will talk terms. The amount of equity you have also helps determine how much you may be able to borrow.

If the amount of money you want to borrow is significant, and your project timeline has some breathing room, a home equity loan may be a better option. Just know, borrowing minimums can be higher than for other loans and will take a few weeks to get approved. One upside to this option? It may also reduce your monthly mortgage payment.

Personal Loans
If you’re in a hurry and not looking to borrow a lot, personal loans have a few top-line benefits as well. One, the borrowing minimum is lower than a home equity loan so if you don’t need much – it can take just days to be approved. There are also fewer fees if any. However, interest rates tend to be higher because lenders aren’t relying on assets, such as a home, to back the loan. The repayment periods for personal loans tend to be shorter, too. They generally run between three and seven years.

When it comes to personal loans vs. cashing out your mortgage with a refinance, what you choose will depend on your own personal needs. Do you need to borrow a significant amount or not? And how fast do you need to receive a payout? You can borrow more with a mortgage cash-out refinance – which will take a few weeks to process – but a personal loan can be approved in a matter of days, though you’d likely have to borrow less but be hit with higher interest rates.



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Paying Off Debt with Personal Loans

Juggling debt can feel like a second job, and Americans are juggling a lot of it. A lot: U.S. household debt climbed to $12.84 trillion the during the second quarter, which means the country added $114 billion to household debt since March, according to the Federal Reserve’s Quarterly Report on Household Debt and Credit. Paying off debt may include everything from student and car loans to credit card debt, but debt is debt, and it must be paid.

One strategy for paying off debt is to pay on time, pay regularly, and – for credit cards – pay more than the monthly minimum.

Another is to take out a personal loan to consolidate other debt and reduce your payment amount.

How personal loans stand out

Personal loans are unsecured debt, which means they are not backed by an asset lenders can take if borrowers can’t pay, like a house or a car. The trade-off is that banks generally charge higher rates for personal loans to offset the lack of an asset.

Despite the higher interest rate, using personal loans for paying off debt can be a good strategy under certain circumstances – and it can save you money in the long run.

Reasons to think personal loan

Lower interest rates and freer cash flow are two reasons a personal loan could be a smart strategy, and could play out a few ways, including:

  • The interest rate could save you money. Calculate the monthly payment and the number of payments of the personal loan. If the total is lower than what you’re currently paying, it’s a money-saving move.
  • It could free up cash flow. Even if a personal loan does not save you money, it could still make sense because it provides a way to stretch payments over a given amount of time, in more manageable monthly payments.

Additional Considerations

In addition to being unsecured debt, personal loans fall into the category of installment debt. Unlike credit cards, for example, which give users flexibility in terms of how much they have to pay each month, installment debt is a contract to pay what the lender says is owed each month.

It may feel like a lot to take in, but it could be worthwhile considering a personal loan if you are looking for ways managing or paying off debt.

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