What is better for me – a cash-out mortgage refinance vs home equity loan?


If you have a mortgage with balance of, say, $100,000 and you need $50,000 cash, you are probably wondering if it is better to take a cash-out refinance of $150,000, or a second mortgage of $50,000.

The answer cannot be easily generalized since there are many factors that will affect your decision. In general, a home equity loan, also referred to as second mortgage, will be shorter in duration, and you’ll be building equity on your house sooner. Both cash-out refinance and home equity can be used to reduce monthly payments over a long period. Usually, a cash-out refinance will have better rates than a home equity.

Also, borrowers who have a several years old mortgage with low rates may do better with a home equity loan. Those who have older mortgages at higher rates will generally fare better if they cash-out. However, do not expect generalizations to give you the right answer. You’d better make the necessary calculations, with all the variables taken into consideration – the amount of cash you need, the rate, insurance and duration of your first mortgage, interest tax bracket, etc.

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