Cash-out refinance vs. home equity loans and lines of credit
Homeowners have three convenient ways to pay for large, even unexpected, expenses—a cash-out refinance, home equity loan or home equity line of credit (HELOC). All three are convenient sources of cash, but which one is right for you will depend on your circumstances and what you’re trying to achieve. Borrowing against the equity, whether through a loan or line of credit, can be less expensive than other forms of personal credit. A cash-out refinance, on the other hand, makes sense if you’re shopping for better mortgage terms.
Which option is right for you?
Here are some important things to think about when deciding between a home equity loan, a HELOC and a cash-out refinance:
- Determine how much equity you have
- Decide how much you need to borrow
- Think about how long you’ll need to repay
- Compare fixed-rate and variable-rate terms
The amount of money you borrow through either a 2nd lien home equity loan or HELOC is based on a percentage of your home’s value, minus the remaining balance on your mortgage. The terms of your original mortgage do not change. With a cash-out refinance, however, you’re taking out a new, larger first mortgage — an attractive option if you need a large sum of cash and either a lower rate or a different repayment schedule.
Home equity loans and cash-out refinances typically are used to obtain large, one-time amounts of cash. A HELOC works best if you need to borrow variable amounts over time because you access available funds only when you need them.
The repayment period for equity loans and refinances are flexible and can be extended as long as 30 years. With a HELOC, you can pay off the amount owed at any time, but after the 10-year draw period any outstanding balance is converted to a principal plus variable interest loan with a 20-year repayment schedule.
Home Equity financing can be a lower-cost option because there are no closing costs. Rates for a home equity installment loan may be higher than for a line of credit but the term is usually longer, so your monthly payments may be similar. HELOCs feature variable rates that may start lower but could rise along with interest rates. A cash-out refinance gives you the chance to lock in a low fixed rate, but closing costs could offset some of the savings.