Could you use some extra cash in your pocket? Is your home worth more than what you owe on your mortgage? If so, there are a couple of financing options to help you tap into your home’s equity. A home equity loan1 and cash-out refinance2 are two common options homeowners use to access a portion of their home equity and it’s up to you to decide which option is better for your personal goals. Let’s get to know the difference between a home equity loan and a cash-out refinance.
What is a home equity loan?
A home equity loan, often called a second mortgage, is a financing option that allows a homeowner to use the home they have already purchased as collateral to access a portion of their home’s equity without compromising the interest rate on their current home loan. Just like with the first mortgage, borrowers will repay their second mortgage in monthly installments.
It’s worth noting that a home equity loan is not the same thing as a home equity line of credit (HELOC). A home equity loan is just like any home loan, meanwhile, a HELOC is a revolving credit line that borrowers can withdraw from as needed. With a home equity loan, you will get a lump sum of cash when the loan closes. You can use that cash however you like, including covering unexpected expenses, paying tuition, consolidating debt, financing home renovations, and more.
Benefits of a home equity loan
The benefits of using a home equity loan are unique to each borrower. Since every situation is different and no two borrowers will have the same equity available, they will see different benefits in their use of a home equity loan as their second mortgage. However, typical benefits of a home equity loan may include:
- Maintain your existing mortgage rate
- Lower monthly payments
- Fixed rate offers predictable payments
What is a cash-out refinance?
A cash-out refinance is a financing option that allows a homeowner, whose home is worth more than what they own on their mortgage, to refinance their new loan to a higher amount and pocket the difference. This is not the same thing as a second mortgage.
With a cash-out refinance, a borrower gets a new mortgage for more than what is owed on their current home loan. The amount a borrower receives from their cash-out refi depends on the amount of home equity they have, or how much the home is worth compared to what they own on their current mortgage.
Benefits of a cash-out refinance
The benefits of a cash-out refinance may not be the same for every borrower and can vary based on factors like market conditions and home values. That said, cash-out refinance benefits can include, but aren’t limited to:
- Potential to improve your current mortgage rate
- One monthly payment
- Possibility of lower credit requirements
Home equity loan vs. Cash-out refinance
When you want to tap into your home’s equity, it’s important to compare your options. On one hand, there is a home equity loan which is a second mortgage taken out on your home which uses your home as collateral and allows you to keep your current mortgage the same. On the other hand, there’s the cash-out refi which refinances your old mortgage into a new, larger loan that gives you the difference back between the two loans as cash. Here’s how the two compare:
Home Equity Loan
- Second loan (separate from mortgage)
- Based on home’s equity
- Maintains initial mortgage’s interest rate
Cash-Out Refinance
- New first mortgage
- Based on home’s value
- Changes initial mortgage’s interest rate
Still have questions about home equity loans and cash-out refinances? That’s what we’re here for. Contact us today to connect with a mortgage expert that can help you find the right solution for your goals.
1All credit decisions for brokered products will be made by a third party. Restrictions and limitations apply.
2All loans subject to credit approval and meeting eligibility requirements. Restrictions apply. Must meet minimum equity requirements. By refinancing an existing loan, the payments and total finance changes may be higher over the life of the loan.
