Cash-Out Refinance vs. Home Equity Loan
Both options can be useful for tapping into your home's equity. However, there are some important differences between them.
Get Started on Your Home Equity Line of Credit (HELOC)
A cash-out refinance is when a homeowner refinances their mortgage to a new mortgage (typically at a lower interest) and in the process borrows more money than what is needed to pay off the current mortgage. The first mortgage is paid off and the homeowner gets a lump-sum payout of the extra cash amount at closing.
A home equity loan provides the loan amount to the borrower in a lump sum, which they then need to pay interest against. A home equity loan does not affect the mortgage, as it is a completely separate loan. Most home equity loans have a fixed interest rate that’s charged on the entire lump sum amount.
Credit Union of Southern California (CU SoCal) offers Home Equity Lines of Credit (HELOCs) and mortgage refinancing.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our mortgage options, home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all of your banking needs.
Deciding between a cash-out refinance and a home equity loan isn't easy, but we can help! Read on to learn the difference between cash out refinance and home equity loan.
What Is A Cash-Out Refinance?
Cash-out refinancing means you are borrowing money against the equity in your home and the home will be used as collateral. If the loan is not paid back in on-time monthly payments, the lender can put a lien on the property and foreclose.
With a cash-out refinance, homeowners can use the cash-out to make home repairs and improvements, pay for college, a wedding, business expenses, and even pay off high interest debt.
Learn more at "What Is A Cash-Out Refinance
Cash-Out Refinance Pros
There are distinct advantages to getting a cash-out refi, including:
Home Improvements And Renovations. One of the smartest uses for cash-out is to reinvest it in your home by making repairs and updates, such as a new roof and windows, or renovating the kitchen and bathrooms.
Consolidate Debt. Using the money to pay off high-interest credit card debt or student loans is a financially savvy use of a cash-out that can also save you hundreds of dollars a year.
Get A Lower Interest Rate. Because the cash-out is part of the new mortgage, there are no separate or unique rates charged on the funds. Therefore, the cash-out will be paid back at the same time as the regular monthly mortgage payments. If the borrower chooses an adjustable rate mortgage or a fixed rate mortgage, the interest paid will reflect the terms of the chosen loan type.
Increased Spending Power. Having access to cash lets homeowners benefit from their money, by paying off high interest debt or paying for their own or a child’s college tuition. Cash-out can be used to put yourself in a better financial position.
Tax Deduction. According to the IRS
, “for you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.” In most cases, you can deduct all of your home mortgage interest. How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. Check with a tax professional for more details on whether your refinanced mortgage interest is tax deductible.
Cash-Out Refinance Cons
There are also some disadvantages associated with a cash-out refi, including:
Closing Costs. Refinancing a home comes with closing costs, which can include: government recording costs, an appraisal fee, credit report fee, lender origination fees, lien search and title services, survey fees (if a new survey is needed), etc.
Cash Won't Be Provided Right Away. If you need the money in a hurry a refinance may not be your best option. You will need to go through an approval, processing and closing process, which could take several weeks.
Loan Terms May Change. Entering into a new mortgage loan means new terms and possibly a new lender with new repayment conditions. And, if you choose an adjustable rate mortgage be aware that the introductory interest rate will change when the loan adjusts.
Appraisal. If your home appraises for less than when you purchased you may not qualify for a refinance or may not be able to take cash out.
Foreclosure Risk. Taking out a larger mortgage to get cash out often means you’ll have a higher monthly mortgage payment, even if you managed to secure a lower interest rate. Should you become unable to pay the loan on-time, the lender can put a lien on your home and potentially foreclose and take possession of the home.
What Is A Home Equity Loan?
A home equity loan
provides the loan amount to the borrower in a lump sum, which they then need to pay interest against. Most home equity loans have a fixed interest rate that’s charged on the entire lump sum amount, but home loans are also available with variable interest rates as well. To learn more read, “What Is A Home Equity Loan
Home Equity Loan Pros
Fixed Interest Rates. Home equity loans typically come with a fixed interest rate. This is beneficial because your monthly payments will be predictable.
Flexible Spending. Use the money any way you’d like!
Lower Borrowing Costs. The interest rate on a home equity loan is typically higher than a mortgage refinance rate, but lower than the rate you’d pay on a credit card cash advance, especially if you need to borrow a large sum of money.
Interest Payments May Be Tax Deductible. According to the IRS
, interest paid on home equity loans and lines of credit may be tax deductible if used to buy, build or substantially improve your home that secures the loan.
Home Equity Loan Cons
You'll Pay Higher Rates vs. A HELOC. HELOCs come with a low adjustable interest rate, which is typically lower than the interest rate charged on a home equity loan. However, the HELOC rate will increase at a set date, unless you refinance sooner.
Home Used As Collateral. If you default on the loan, the lender can put a lien on your home and foreclose, and you could lose your home. Failure to make on-time payments will also hurt your credit score.
Closing Costs: Home equity loans have closing costs, which may include an application fee, appraisal fee, processing fee, and more.
You'll Have Two Mortgage Payments. Whether or not you use the full amount of the lump sum home equity loan, the lender will expect you to pay monthly interest on the total loan amount. If you have used any part of the loan, your monthly payment will include interest and principal. These payments can really add up, so be sure you have reliable employment and income.
How To Decide Between A Cash-Out Refinance And A Home Equity Loan
Which is better cash out refinance or home equity loan? If you have a high mortgage interest rate or and adjustable rate mortgage that’s about to adjust to a higher rate, then refinancing and getting cash-out can be a great opportunity to refinance to a lower rate and get cash out at the same time. However, if you have a low interest rate (under 4%) then you may not want to risk losing this low rate in a refinance. If this is the case, consider applying for a home equity loan or HELOC. While both of these types of loans are secured by the equity in your home, they don’t require a mortgage refinance.
Learn more at: “HELOC vs. Home Equity Loan
What About HELOCs?
In addition to getting cash through a cash-out refinance or a home equity loan, another way to use your home equity to access cash is a with a Home Equity Line of Credit (HELOC).
A Home Equity Line of Credit
is a type of “revolving” credit that is provided by a lender, has a credit limit, a variable interest rate, and is secured by the equity in a home. A HELOC typically has a lower interest rate than credit cards and can be used for any type of purchase. Because HELOCs start with a low variable interest rate, you may benefit from savings on interest.
Unlock a home equity loan (that requires the borrower to pay interest on the entire loan amount, whether it’s used or not), a HELOC requires that you only pay interest on the amount you use. Some lenders charge an inactivity fee if you don’t use your HELOC funds, so be sure to understand the terms of the loan. Check out these HELOC Requirements
to help you decide which loan is right for you.
Features Of A CU SoCal HELOC And Home Equity Loan
A CU SoCal HELOC or home equity loan allows you to leverage the equity in your home to help you achieve your financial goals. Whether you’re looking to start that big renovation, make emergency repairs, or simply need additional cash-on-hand, we’re here to help make it happen.
- No points.
- No appraisal fees for single unit loans.
- No annual fee.
- No closing costs.
- A generous limit up to $250,000.
- Possible tax deductions on interest payments.
Why Savvy Consumers Choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our HELOC experts.
Refinance Your Mortgage with Cu SoCal.
Get Started on Your Home Equity Line of Credit (HELOC)