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Cash-Out or Home Equity Line of Credit?

by Gabriel  Traverso
Mortgage Directory Columnist

Perhaps you have credit card debt you want to pay off, or you want to make home improvements. Maybe you have an adjustable rate mortgage that's about to reset. Whatever the reason, you've decided it's time to refinance your mortgage. Which is the best option for you?

Trying to evaluate the best refinance option can be challenging. For the sake of this discussion we'll assume you've narrowed it down to either a home equity loan or a cash-out refinance. To decide which is the best loan for you, consider the following factors.

Do You Need to Access to Your Equity Quickly?

Home equity loans typically close faster than a cash-out refinance. On top of that, home equity loans usually have lower fees, or closing costs, than a cash-out.

What About the Rate?

A home equity loan's rate is usually tied to the prime rate, which is currently at 8.25%. Since it is generally possible to get a cash-out option at a fixed rate, and 30-year fixed-rate mortgages are averaging 6.2% right now, this can make the cash-out loan more cost-effective in the long run. This means you get the cash you want at a lower overall cost. While this may raise your rate now, it could still save you money over getting a home equity loan or line of credit, both of which are likely to have an even higher rate.

The Term

Another factor to consider is the term of the loan. With a refinance you are limited in your options, usually to 15 or 30 years. However, with home equity products you may have more flexibility and can take a shorter term.

As you can see, there is no black and white answer. Based on these factors, the best option for you may be different than for others. The biggest consideration is going to be what you want to do with the money you're planning to borrow. As you think this over, make sure to take into account both your short- and long-term needs.

FreddieMac: Refinance Activity Remains High; Cash-Out Share Falls in Fourth Quarter

About the Author
Gabriel Traverso is a freelance writer, independent musician, and artist. He resides in Reno, NV.

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