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Choosing a Cash-out Refinance or Home Equity Loan

Karen Lawson
LoanBiz Columnist

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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

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