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Refinance to Get Cash Out of Your Home

Though property values are not at their highest historic levels, many homeowners have equity in their homes. It's impossible, however, to access this equity and put it toward everyday expenses without the use of some kind of financial instrument. There are three primary ways that homeowners can draw out their home equity.

• Sell the house.
• Open a home equity line of credit (HELOC).
• Refinance with a cash-out refinance.

You can also access your home equity through a reverse mortgage, but additional qualifications apply.

Selling your house can be a good idea, but not if you need a place to live. If you're able to sell the house for everything that it's worth and pay off any remaining debts with the proceeds, your equity is equivalent to whatever cash you have left over, and this cash can be spent on anything, including the down payment on a new home. But it can be a hassle to sell a house, and the market is not good for selling at the present time. There are better ways to access your equity.

The best ways to access your equity are the other two options: a HELOC or a cash-out refinance. But which of these two is right for you? There are many differences between them.

Loan amount. A cash-out refinance allows you to access the entire sum of your equity at once. This can be extremely helpful if you're trying to generate cash for a large expense, such as a car, a wedding, or a second home. A HELOC allows you to access small amount of your equity as needed. This can be helpful if you need money to cover smaller expenses, such as home maintenance or minor medical bills. A HELOC can also be friendlier to your credit score than other types of debt.

Mortgage precedence. A HELOC is like a small second mortgage, but you have to pay it off before you can pay off your primary mortgage. You'll be making double payments each month to pay back both loans. A cash-out refinance, however, erases your previous mortgage and replaces it with the new one. Your payment remains the same and continues to go toward paying off your home.

Interest rate. It's simple. Refinance rates are typically much lower than HELOC rates. Mortgage rates are usually lower than credit rates, and this is no different. You'll pay less in interest as a percentage of your loan amount if you go with a cash-out refinance. Compare mortgage rates when looking for lenders in order to get the best deal.

Loan term length. As mentioned, a HELOC gets paid off at the same time as your mortgage. The term length of the HELOC loan itself is actually fairly short as a result. A cash-out refinance allows you to pay back the loan over any number of years. It's a mortgage, after all. If you've refinanced into a thirty-year mortgage, your loan payments will be spread over those thirty years. You don't have to hurry to pay it back.

Closing costs. A cash-out refinance, as with any mortgage, will require you to pay closing costs and other administrative fees. A HELOC typically requires no closing costs because it's a line of credit. Be prepared for other fees, however, depending on your lender.

This comparison should help you determine whether a HELOC or a cash-out refinance is the best way for you to access your home equity.

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