Personal Finance

Should I Get a Personal Loan or Refinance My Mortgage

Name: Article comparing personal loans to mortgage refinancing
Brand: Axos Bank

Oct 13, 2020

Thinking of a loan to help with an upcoming expense? If you’re a homeowner, here are two loan options to consider: You can tap into your home equity with a cash-out refinance or get money faster with a personal loan.

Exploring some key differences between these two loan types can help you decide which one is right for you.

What is a personal loan?

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 any purpose.

Why should I get a personal loan?

A personal loan can give you flexibility when it comes to borrowing money. Whether you need to remodel your home or make a major purchase, a personal loan can fit to your financial needs without much lead time.

What is a cash-out mortgage refinance?

With a cash-out mortgage refinance, you update your existing mortgage so that it’s for a larger amount than what you currently owe. Your current home loan is paid off and you receive the extra cash that you need for your project.

When applying for a cash-out mortgage refinance, your lender will likely look at factors like:

Income
Employment
Debt
Property value
Credit history

Like a personal loan, you will make monthly payments with no restrictions on how you can use the money.

How is a personal loan different than a cash-out mortgage refinance?

Differences between the two loan types include the collateralization process, interest rates, speed of funding, loan amounts, loan fees, repayment periods, and even potential tax benefits.

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.

Interest Rates

Generally, a home loan will offer a lower interest rate than a personal loan 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 is affected by your credit score, income, and the loan amount.

Mortgage rates can change hourly, so if you’re leaning that route, you’ll want to keep an eye on home loan rates.

Speed of Process

The approval process for a home loan typically involves an appraisal and detailed underwriting, as well as other requirements – all of which require time.

Personal loans generally have a faster approval process, offering access to cash in days.

Loan Amounts

Both loan types offer a wide range of loan amounts, but home loans typically offer more than personal 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 want to consider a refinance, regardless of the amount of cash you’re seeking.

Loan Fees

The fees associated with either type of loan will depend on the lender you choose. However, a range of 0% to 5% of the loan amount 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, you can generally expect to pay more in fees for a home loan when making a dollar-for-dollar comparison. 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.

Repayment Period

Personal loans have a shorter repayment period; for example, Axos Bank offers repayment periods of three to six years.

You’ll have a longer repayment period with a cash-out refinance. The most common home loan terms offered by Axos Bank are 15 and 30 years.

Tax Benefits

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, depending 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
Quick Funding
Longer Repayment Period
Lower Loan Fees
Lower Interest Rate
No Collateral Required
Potential Tax Benefits
Larger Loan Amounts

A side-by-side comparison is helpful in determining whether a personal loan or cash-out refinance is right for you. Both options 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.

Additional Financing Options

If you’re looking for an option that you plan to pay off quickly, a home equity line of credit (HELOC) is another option to explore. It offers flexible payment options and doesn’t require re-setting your mortgage.

HELOCs also allow you to draw money over a set period, which works well when you have several large expenses on the horizon.

We have a helpful article if you’d like to learn more about leveraging your home equity to meet your goals – HELOC or Cash-Out Refinance: Which Is Right for Me?

As a Homeowner, You Have Financing Options

From a personal loan to a cash-out refinance, or even a HELOC, homeowners have several options when it’s time to finance a project. If you’re ready to make home improvements, host a wedding, or have another major expense, keep Axos Bank in mind.