Home Equity Loans: Cash Out Alternative to 1st Mortgage Refinancing

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If you bought your home in the last couple of years in a hot market at a great interest rate, you may be wondering about the best way to cash out your equity. Maybe you need to consolidate debt or would like do some home repairs and remodeling. Leaving your 1st mortgage loan at the current low rate makes much more sense than refinancing at a higher rate, but how do you get to your equity? A home equity loan or home equity line of credit can be a great alternative to a refinance of your current loan.Home equity loans can work as a cash out second mortgage, giving you access to up to eighty percent of your available equity at once. A standard home equity loan generally has a fixed mortgage rate, meaning a fixed payment that you can depend on monthly. The payments may be higher than a home equity line of credit at first, especially compared to a line of credit with an interest only payment period, but you can be certain of how much you are paying monthly down the road as well. An adjustable rate mortgage in a market with rising interest rates may be liability for some, but if you are planning on paying back your loan quickly it may be a better option than credit cards. Also some mortgage products allow you to convert your home equity line of credit into a fixed-rate home equity loan at the current rate.A home equity line of credit (HELOC) is another way to access your equity, but it works more like a credit card. A HELOC is a revolving account that can be utilized as needed during the draw period and paid back in monthly installments or all at once. These loans have a variable interest rate and work as an adjustable rate mortgage. Generally, however, the interest is better on a HELOC than a credit card because it is a secured loan. Even better, consumers with home-equity loans can frequently deduct interest payments on their federal and state income taxes. Credit card interest however, is not deductible. “In effect, the tax deduction lowers the interest rate,” states Keith Leggett, senior economist for the American Bankers Association. Either of these loans may be a better option than refinancing in today’s market. Be sure to find a lender you can trust and fully discuss all your options.

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