What’s Right for Me? A Cash Out Refinance or Home Equity Loan

While cash out refinance and home equity loans offer essentially the same benefit, they are quite different loan products. Let’s look at the differences:

Cash Out Refinance Loan

A cash out refinance loan is essentially a new larger loan to pay off an older loan with the difference in loan amounts being provided to the homeowner in cash at closing. For example, let’s say you have a 10-yr old mortgage that has been paid down to say $100,000 and your home is worth $250,000. A lender might be willing to finance say 80% of your home’s appraised value or $200,000. So in this case with a cash out refinance loan, you would be taking home $100,000 at closing and you’d have a new mortgage loan of $200,000 afterward.

Home Equity Loan

With an equity loan, your primary mortgage (if any) would remain in place and a new second mortgage would be issued using your home’s equity as collateral. With a loan you’d receive a lump sum payout at closing, whereas with a home equity line of credit you would be issued a credit line that you can tap as needed.

If you need quick access to cash, a home equity loan is preferable. Also your closing costs for an equity loan will be minimal or even non-existent. Whereas closing for a cash out refinance could take weeks and you’ll incur an origination fee and all the usual costs of closing a new mortgage loan. Also, in some cases, you may able to achieve a higher loan-to-value ratio with a home equity loan than you might be able to with a refinance mortgage. Most mortgage lenders these days are only comfortable up to say 80% LTV, but you may be able to find a home equity lender that will go up to 85 or 90% LTV. As with any major decision, make sure you compare home equity loans from several lenders before making a final choice.