Home Equity Opportunities

Cash-Out Refinance vs. Home Equity Loan: What’s the Difference?

Andrew Vassallo

January 08, 2019

Compare your financial situation now to when you first took out your mortgage. What’s changed?

Chances are, a lot. Perhaps your interest rates have skyrocketed or your monthly loan payment has become more than you can afford. Refinancing can help you shift your debt to a better place.

Every year, millions of homeowners choose to refinance. However, before you choose to refinance, you’ll want to consider if it’s the best option for you or if there’s a smarter way to access cash.

What Is a Cash-Out Refinance?

According to NerdWallet, “a cash-out refinance replaces your existing mortgage with a new home loan for more than you owe on your house.” That means you get a larger sum of money than what you owe.

While you can use the money for pretty much anything, Zillow recommends using it to improve your financial situation by paying down debt or renovating your home. Consolidating or eliminating your debt will help improve your overall credit while home improvements can help increase your home’s value.

**Refinancing Your Mortgage: The Pros, the Cons, and Your Options **

How Is a Home Equity Loan Different?

A home equity loan allows you to borrow money against the equity you’ve accrued in your house, using your home to guarantee the loan. Cash-out refinancing requires you to take out an entirely new mortgage and monthly payment.

Both provide a large sum of cash and both have tough credit restrictions. On average, you need a credit score of 680 or above. If your score is lower, prepare to pay higher interest rates.

Which Is Better for You?

Determine why you want to refinance. Is it because you need liquid cash? Do you just want to find a lower interest rate? With your goal in mind, you can weigh your options.

If you can find lower interest rates, cash-out refinancing is a smart option. This is particularly true if you’re looking to fund higher education as you may find lower interest rates than private education loans. If cash-out refinancing won’t lower your interest rate but you still need cash, you may want to consider a home equity loan instead.

Cash-out refinancing is also a savvy option for those looking to refinance and take out cash. As Alan Moore, CEO of AdvicePay, shared with Bankrate, cash-out refinancing is a “good way to grab equity and keep it all in one loan.”

As with any financial decision, you’ll want to consider the costs. Cash-out refinancing comes with high closing costs for the loan and often higher monthly payments. After all, you’re taking out a larger mortgage, which means bigger payments and more interest across the life—often 15 to 30 years—of the loan.

Your Third Option

If you’d like to access the equity built up in your home but don’t like the idea of additional monthly payments or unpredictable interest rates, Hometap could be a good fit for you.

Hometap gives you access to the equity you’ve built up in your home in cash today without interest or monthly payments and relatively low closing costs.

Find out if tapping into your home’s equity is a fit for you!

*Hometap Note: The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

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Andrew Vassallo

is a

VP, Operations

at Hometap.