Home Equity Loan vs Cash-out Refinance: Your Choice

Home equity loans can help you convert home equity to cash without the full expense of cash-out refinancing. If your mortgage is at or near current market rates, getting a home equity loan can help you avoid the additional cost and potential delays associated with refinancing.

Home Equity Loan vs. Refinance

Home equity loans or second moprtgages are available at low or no cost, but their rates are significantly higher than first mortgages. A major advantage of getting a home equity loan is that you won't have to pay for mortgage insurance if the combined loan-to-value ratio (CLTV) of your first mortgage and home equity line exceed 80 percent. Here's an example.:

  • Your home is worth $200,000. and your mortgage balance is $150,000. You want to refinance for $165,000 to consolidate credit card debt.
  • Your LTV would be 82.50 percent (calculated by dividing the refinance loan amount of $165,000 by the current value of your home $200,000) Your new lender would require mortgage insurance (MI) on your refinance mortgage. MI is also increasingly hard to get. In addition, the cost of refinancing and paying MI could very well negate the effect of lower monthly payments.

If your primary reason for refinancing is to get extra cash, you can avoid paying for MI by taking out a home equity loan or line of credit. To help decide whether cash-out refinancing or taking a home equity loan is best for you, use a mortgage comparison calculator and check your current mortgage against potential new mortgages.

Refinancing means starting over with a new mortgage, and that requires going through the closing process and paying substantial costs. Home equity loans can be obtained for little or no costs, but their rates are quite a bit higher. Refinancing can be a good choice if:

  • You can significantly reduce your current mortgage rate by refinancing.
  • You plan to stay in your home long enough to recoup the costs of refinancing.
  • Or, you can get a no-cost refinance with a better rate than you have now.

Check out refinancing options by using a refinance calculator; this can help you estimate costs and new payment amounts. Home equity loans or cash-out refinancing can be helpful for paying off major expenses like medical bills, consolidating credit card debt, or financing home improvements.


Posted By :
Karen Lawson is a freelance writer with extensive background in mortgage banking. She holds BA and MA degrees in English from the University of Nevada, Reno.

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