Differences Between HELOCs vs. Cash-Out Refinance vs. Second Mortgages

When considering ways to access the equity in your home, you have three primary options: a home equity line of credit (HELOC), a cash-out refinance, or a second mortgage. Each option has its own set of pros and cons, so it’s important to evaluate your needs and objectives before making a decision.

A home equity line of credit (HELOC) is a revolving line of credit that you can draw on as needed. HELOCs typically have lower interest rates than other types of loans, and you can pay down the principal balance or take a pause in payments when cash is tight. However, HELOCs are variable-rate loans, so your payments could increase if interest rates rise. In addition, HELOCs typically have shorter repayment terms than other types of loans, so you’ll need to be prepared to make higher monthly payments once the draw period ends.

A cash-out refinance allows you to tap into your home equity by taking out a new mortgage that’s larger than your current loan balance and using the difference to pay off your existing mortgage and other debts. This can be a good option if you can get a lower interest rate than what you’re currently paying on your mortgage and if you have a solid plan for how to use the extra cash. However, a cash-out refinance means starting over with a new 30-year loan, which could mean paying more interest over the long run.

A second mortgage is a loan that’s secured by your home equity—that is, the value of your home minus any outstanding mortgage debt. Like a cash-out refinance, a second mortgage allows you to tap into your home equity and use the funds for any purpose. However, second mortgages typically have higher interest rates than first mortgages, so they may not be the best option if you’re looking to save on interest costs. In addition, second mortgages are separate loans from your first mortgage, so you’ll make two separate monthly payments instead of one.

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