Cash-Out Refinance vs Home Equity Loan

Cash-out refinancing for your home is different from a home equity loan in many ways. First of all, with cash-out refinancing, you are refinancing your mortgage for more than you now owe, and you get to keep the difference. Hence the term “cash out”.

Here’s an example of this: Let’s say you still owe $70,000 on a $160,000 house, and you want a more attractive interest rate. You would also like $30,000 cash to perhaps spend on your child’s college tuition. What you can do here is refinance what’s left on the mortgage for $100,000. What you’re really looking to do here is get a better rate on the $70,000 you still owe on the house and get a check for $30,000 in the process to spend as you see fit.

Another difference between the two is that a home equity loan is another loan on top of your original mortgage. A cash out re-finance is simply replacing your first mortgage. But because of this, you’re going to be paying closing costs, whereas with home equity, you don’t. And the closing costs can add up quickly.

If the mortgage you have now is set at a lower rate than what you can get by refinancing, then it’s better to go with a home equity loan. There are a few differences here as you can see. And monetarily speaking, they can make a big difference. But once you know what the differences are in accordance to what your financial needs are, the decision shouldn’t be too hard to make.