When Is a Home Equity Loan Better Than a Cash-Out Refinance?
One of the reasons why a home is such a good investment is that there are many ways to continue to use your home's value for other purposes as you need it. Two of the most popular options to choose from to tap your property's value include a cash-out refinance and a home equity loan (HEL). Both have their uses, but a home equity loan may prove better as you closely compare the two:
Cash-out refinance: When cash is king
A cash-out refinance is used to refinance an existing mortgage for an amount more than you currently owe in order to receive the extra cash at the time of the refinance for other uses. Here are a two possible outcomes if your decide to take this route with your home:
- A cash-out refinance is a new loan that replaces your first mortgage—meaning it closes your first mortgage and opens a new one. This can be a good way to get extra cash and keep it in one loan. One thing to note, your repayment schedule usually changes with a cash-out refinance, which could mean new (and potentially longer) terms concerning your mortgage.
- The closing process is often lengthy with a cash-out refinance and can incur higher costs than a home equity loan—perhaps thousands of dollars and up to 7 percent of your loan amount.1
Home equity loan: Leverage with less expense
A home equity loan (HEL) lets you borrow a fixed amount of money—secured by the equity in your home—and receive your money in one lump sum. Here are some important things to know when considering an HEL:
- A home equity loan can be a good way to utilize the value of your property with fewer costs. After you qualify, a home equity loan allows you to borrow a specific amount of money, which can be used for home improvement, debt consolidation, major purchases or a variety of other needs.
- Because it's not linked to your first mortgage, you can select your repayment term independent from the term of your first mortgage, which means your new loan will have a separate rate and term from your first mortgage.
- Closing costs/fees are usually considerably lower than a cash-out refinance and the process is typically quicker to complete.2 And many, such as those from Discover Home Loans, don't have closing costs at all.
- Fast and flexible, home equity loans tend to offer more short-term repayment options,1 which may allow you to pay less interest over time than cash-out refinancing.
In conclusion, cash-out refinancing can give you access to much needed cash, but may cost you. A home equity loan, however, can help you leverage money out of your home without unnecessary expenses. Ultimately, your choice should depend on your current and long-term financial needs and goals.