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Home Equity Loans vs. Cash-Out Refinancing: Which is Better?

Deciding between a home equity loan and a cash-out refinance can depend on factors such as the current terms of your mortgage.

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Many Americans are facing economic challenges, whether due to job losses in their industries, rising prices or general uncertainty about where the economy is headed. Among these concerns, some homeowners may be looking to tap into them Home is equal.

By accessing more cash from their home equity, homeowners can gain the flexibility to navigate difficult situations, such as going through periods of unemployment. Or you can seek funding for things like home renovations.

That said, tapping into your home equity can come with additional costs, such as interest paid on the loan, as well as risk, such as potential foreclosure if the loan is unable to be paid back. But if you are comfortable taking this loan to get more cash advance benefits, then you can consider Apply for a home equity loan or a Cash-out refinancing.

These two popular ways to access your home equity have different advantages and disadvantages, and deciding which one is better depends on your situation. Here, we’ll take a closer look at both options.

If you think a home equity loan might be beneficial to your situation, start exploring rates and terms here.

What is a home equity loan?

A home equity loanOften referred to as a second mortgage, usually a fixed rate loan that allows you to borrow against some of the equity in your home and receive a lump sum of cash.

It often exists alongside your current mortgage, and your current mortgage amount and yours Home equity loan Typically can add up to about 85% of your home’s appraisal, although the exact amount can vary by lender and your situation.

For example, if you have $1 million left on your mortgage and a home worth $500,000, you can take out a home equity loan for $350,000, because that means you’re borrowing 85% of your home’s total value.

What is a cash-out refinance?

Although a home equity loan can exist alongside your current mortgage, Cash-out refinancing Usually involves replacing your mortgage with a new, larger loan. The amount you borrow can be taken as cash when it exceeds your mortgage balance.

A Cash-out refinancing There is usually a limit of 80% of the value of your home, although this can vary from time to time. And the interest rate can be either fixed or variable.

For example, if you have a mortgage of $1 million and a home worth $500,000, you Doing a cash-out refinance For $800,000. That money will then be used to pay off your existing mortgage, leaving you with $300,000 in cash.

However, your total debt will then be $800,000, as opposed to your previous $500,000. You’ll pay interest on the full amount, so that can affect how much cash you decide to borrow.

Explore your refinancing options here to see if it makes sense for you

When it may be better to use a home equity loan

If you’re happy with your current mortgage terms but still want to access cash from your home equity, you may be better off using a home equity loan.

Given that interest rates have generally risen over the past few years, the interest rate on your home equity loan may be significantly higher than your mortgage rate. But that home equity loan will only be a portion of your debt (and it may still have lower rates than options like credit cards and personal loans). With a cash-out refinance you’ll still keep your existing mortgage instead of replacing it entirely with a potentially high-interest rate loan.

Learn more here.

When it may be better to use a cash-out refinance

If you’re looking to refinance your existing mortgage, such as if you recently took out a mortgage at a higher interest rate than currently offered and you want to access some of your home equity, you may be better off with a cash-out refinance.

When doing a cash-out refinance, you may decide to change your mortgage terms, such as switching to a 15-year instead of a 30-year mortgage to pay off your loan faster.

Cash-out refinances have lower interest rates than home equity loans. However, you have to do the math to see what would be more expensive on an overall basis. Compare the total cost of a cash-out refinance with the total cost of your current mortgage and a home equity loan.

Learn more here.

Bottom line

Both home equity loans and cash-out refinancing can help homeowners access cash, but they can incur additional costs. If you want to borrow money in one of these ways, consider what the total costs will be instead of just looking at the headline numbers.

A cash-out refinance may have a lower interest rate than a home equity loan, but it may be more expensive overall if it replaces a lower-interest-rate mortgage. In other cases, though, a cash-out refinance can help you adjust to more favorable mortgage terms while cashing out gives you additional flexibility.

See what makes sense for your situation and consider talking to an advisor who can help you weigh different borrowing options.

MoneyWatch: Managing Your Money

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