Home equity loan or cash-out refinance? Which is the better choice?
When you need funds for a major expense, you might be considering a home equity loan or cash-out refinance. As a homeowner, you have the unique benefit of being able to tap into the equity you build over time. Home equity is the value of your home minus what you still owe on your mortgage. For example, if your home is valued at $500,000 and you have $400,000 left on your mortgage, you have $100,000 in equity that you can borrow against.
You have options when it comes to using your equity. You could take out a home equity loan or a cash-out refinance. Learn more about these types of lending options and which is right for your financial needs.
Home Equity Loan
A home equity loan is a type of installment loan that allows you to borrow against the equity in a home. Home equity loans tend to have fixed rates, which makes them more reliable and easier to manage. They are paid out in lump sums, which means you will get the loan amount all at once.
A cash-out refinance is a type of mortgage refinance that is based on the equity you’ve built in your home. In other words, you get cash upfront and accept a larger mortgage. Unlike a home equity loan, with a cash-out refinance, you are adjusting your current mortgage. Cash-out refinances tend to come with lower interest rates than credit cards since they are backed by your home as collateral.
Home Equity Loan or Cash-Out Refinance
There’s one main reason that it’s more beneficial to take out a home equity loan right now over a cash-out refinance – you’re borrowing less money. When interest rates are high like they are now, you want to watch how much you borrow.
For example, let’s say you need $30,000 to do a kitchen remodel, and you have a $300,000 mortgage. You could qualify for a $350,000 cash-out refinance, but you would then be paying interest on a $350,000 mortgage. When you take out a $30,000 home equity loan, you’re only borrowing $30,000 instead of the money you need to borrow and the balance of your mortgage.
In addition, if you currently have a good interest rate on your mortgage, you could increase it substantially by refinancing while interest rates are high.
If you need funding for a home improvement project, you might be considering a home equity loan or cash-out refinance. Both options rely on the equity you have built in your home. If you don’t have equity, you might consider a personal loan instead.
With today’s interest rates being high, you could benefit more from a home equity loan, since you would only be borrowing the amount you need for your project vs increasing your mortgage overall.
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