Borrowing home equity? These 3 things can help you pick the right loan type.
If you're a homeowner, the equity you've built up over time can be a valuable resource to borrow from at competitive rates — especially compared to other borrowing options today.
But there are a few different ways to borrow from your home equity, each with their own benefits and costs. A cash-out refinance, for example, gives you the option to take out a new mortgage at a higher amount, replacing your existing one. But a home equity loan or home equity line of credit (HELOC) is a separate lending option you'll take on in addition to your mortgage.
If you're looking to borrow money from the equity you have in your home, it can help to know the ins and outs of these products, so you can ensure you're making the right choice for your financial situation and goals.
Compare today's top refinance rates to find the best option for you.
3 things that can help you choose the best home equity option
Here are three factors to consider before you decide between a cash-out refinance, home equity loan or HELOC.
Your current mortgage rate
Whether or not you're happy with your current mortgage rate is one way to decide which product to choose.
A cash-out refinance is the only borrowing option among these that will change your existing mortgage loan. If your mortgage rate is very high and you have the credit to qualify for a better rate today, refinancing could be the best option. Even though a cash-out refinance will increase the overall amount you owe, you could save money with less interest owed over the lifetime of the loan.
On the other hand, if you have a low mortgage interest rate — maybe you locked in a historically low rate during the pandemic, for example — you may not want to risk increasing the interest you owe. Instead, consider borrowing separately from your mortgage in the form of a home equity loan or HELOC. Luckily, both carry very competitive interest rates today compared to other borrowing options, like personal loans or credit cards.
See today's top home equity rates here now.
How you want to access the money
The amount of money you'd like to borrow — and how you want access to it — is another factor to consider.
Both home equity loans and cash-out refinancing will result in a lump sum that you can put toward your financial goals — whether you're looking to complete a home renovation project or pay down existing high-interest debt. This could be good if you have a specific goal in mind and know how much money you'll need to complete it.
With HELOCs, on the other hand, you're approved for a line of credit which you can borrow from as you need for a specific amount of time. Unlike a second mortgage or cash-out refinance, you'll only pay interest on the amount you actually use, not the entire credit line you're approved for. This could be the better choice for you if you may want to complete multiple projects over time or use your home equity as a safety net.
What you'll use the money for
Along the same lines, what you're using the money for can help you decide between borrowing options, too.
With a cash-out refinance, you can use the money you borrow for basically anything. However, it's generally a good idea to use it to put more value back into your home to boost your equity, or as a way to consolidate and pay down debts that carry higher interest rates.
But home equity loans and HELOCs have added incentives if you use them for qualified home renovations or repairs. The IRS allows you to deduct the interest you pay toward these loans from your taxes if the money is used for eligible renovation costs.
While home equity loans or HELOCs may also be useful for paying down high-interest debt and other financial obligations, there's a clear incentive to putting the money you borrow back into your home's value.
The bottom line
If you're a homeowner looking to borrow money today, looking toward your home equity can be a solid option — and potentially help you save as interest rates rise. Before you decide whether a cash-out refinance, a home equity loan or a HELOC is right for you, make sure you understand the benefits and drawbacks of each. The rate you're currently paying on your mortgage, options you'll have for accessing your money and what you actually intend to use it for can all help you decide the right borrowing option for you.
Also remember: One trait that cash-out refinancing, home equity loans and HELOCs all share is that they are secured forms of borrowing guaranteed by your home. Regardless of the type you choose, you should make a plan to budget for your monthly payments and repay the amount you owe in full and on time each month. Otherwise, you could risk losing your home.
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