If you're a homeowner, you may be considering tapping into your home's equity to pay for expenses such as home improvements, medical bills, or college tuition. Two popular options for accessing home equity are home equity loans and cash-out refinances. In this article, we'll explore the differences between these two options and help you determine which one might be right for you.

What is a Home Equity Loan vs Cash Out Refinance?

A home equity loan, also known as a second mortgage, allows you to borrow a lump sum of money using your home as collateral. You'll receive the loan in one lump sum, and you'll make fixed payments over a set period of time, usually between 5 and 30 years. Home equity loans typically have a fixed interest rate, which means your payments will stay the same throughout the life of the loan.A cash-out refinance allows you to take out a new mortgage for more than you currently owe on your home. The difference between the new mortgage and your current mortgage is paid out to you in cash, which you can use for any purpose. Cash-out refinances typically have a lower interest rate than home equity loans, but you'll have to pay closing costs on the new mortgage.

Key Differences Between Home Equity Loans and Cash-Out Refinances:

Here are some key differences between home equity loan vs cash out refinance to keep in mind:

1. Loan Type:

Home equity loans are second mortgages, while cash-out refinances replace your existing mortgage with a new one.

2. Loan Amount:

Home equity loans typically have a maximum loan amount of 85% of your home's value, while cash-out refinances can go up to 80% to 90% of your home's value.

3. Interest Rates:

Home equity loans typically have a fixed interest rate, while cash-out refinances can have a fixed or adjustable interest rate.

4. Payment Terms:

Home equity loans have fixed payment terms, while cash-out refinances have a new payment term based on the new mortgage.

5. Closing Costs:

Home equity loans typically have lower closing costs than cash-out refinances, which can include fees for an appraisal, title search, and other services.

Which Option is Right for You?

The option that's right for you depends on your specific financial situation and goals. Here are some factors to consider:

1. Loan Amount:

If you need to borrow a specific amount of money, a home equity loan may be the best option since you'll receive the money in one lump sum.

2. Interest Rates:

If you can get a lower interest rate on a cash-out refinance than on a home equity loan, it may be worth considering.

3. Payment Terms:

If you prefer the stability of fixed payments, a home equity loan may be the better option for you.

4. Closing Costs:

If you want to avoid high closing costs, a home equity loan may be the better option.

5. Credit Score:

Your credit score may affect which option is available to you and the interest rates you'll qualify for.

Conclusion:

Both home equity loan vs cash out refinance can be useful ways to tap into your home's equity, but they have different pros and cons. Consider your specific financial situation and goals when deciding which option is right for you.