Choosing a Cash-out Refinance or Home Equity Loan
Karen LawsonLoanBiz Columnist
There are plenty of
reasons for getting a cash-out refinance or a home equity loan, and determining
the right solution depends on the use to which the funds will be put. The
decision to cash out equity can depend on the owner's financial situation, the
amount of home equity available, and the reasons for needing additional cash. Popular
home equity loan options include:
Cash-out Refinancing
If a better rate or more favorable terms are available, cash-out
refinancing may deliver a better mortgage and the extra cash needed. Mortgage
rates are not always the reason for considering refinancing, as refinancing from
an ARM to a fixed rate can help stabilize monthly payments. Homeowners
generally use cash-out refinancing for debt consolidation or home improvement projects.
Using home equity to pay off more expensive debt or to finance a value-boosting
home improvement can be a smart investment and may be tax deductable too.
Homeowners should check with a finance or tax advisor before signing loan
documents.
Home equity loan
(second mortgage)
A traditional home equity loan delivers a lump sum and is repaid
with equal monthly payments over a specified term. Typically, home equity loans
carry slightly higher interest rates than first mortgages but lower than
unsecured consumer loans. A home equity loan can supply cash when borrowers
need a lump sum for debt consolidation, an expensive medical procedure, or
other one-time expense. A home equity loan is an alternative to cash-out
refinancing for homeowners who like their existing first mortgage but want to
access home equity funds.
Home Equity Line of
Credit (HELOC)
A home equity line of credit is a revolving account that can
be drawn on at will and offers the most flexibility. The major benefit of a
HELOC is that borrowers only pay interest on the amount used. Homeowners can access
HELOC funds as needed for an extensive home improvement project, periodic
tuition payments, or to start a business. HELOCs can be paid off and reused as
needed. HELOC loans typically carry higher rates than traditional mortgage loans.
Cash-out refinances, home equity loans, and home equity lines
of credit are all mortgages secured by a home. Cash-out refinance loans or home
equity loans can help homeowners manage finances if used responsibly. When
considering cash-out mortgage financing, homeowners should check with an
accountant or financial advisor to make sure your loan fits in with their financial
plans.
About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage banking. She holds BA and MA degrees in English from the University of Nevada, Reno
