What's the Best Way to Borrow Against Your Home: Mortgage, HELOC, or Cash-Out Refinance?
When you need money, there's a good chance your home can provide it. Here are three common ways to tap into your home equity.
Mortgage vs. HELOC vs. Cash-Out Refinance
If you're like most Americans, your home is your biggest asset, and it can be your best source of cash when you need it.
There are several ways to borrow against your home, each with its own pros and cons. The right choice depends on your needs and your financial situation.
A mortgage is a loan that uses your home as collateral. If you don't repay the loan, the lender can foreclose on your home and take possession of it.
Mortgages are typically used to purchase homes, but they can also be used to refinance an existing mortgage or to borrow against the equity you've built up in your home.
Mortgages typically have fixed interest rates, which means the interest rate doesn't change for the life of the loan. This makes it easy to budget for your monthly payments.
Mortgages also typically have longer terms than other types of loans, which means you can spread out your payments over a longer period of time.
The downside of a mortgage is that it can take years to pay off the loan. And if interest rates rise, your monthly payments could become unaffordable.
A home equity line of credit (HELOC) is a type of loan that uses your home as collateral. Like a mortgage, if you don't repay the loan, the lender can foreclose on your home.
HELOCs typically have variable interest rates, which means the interest rate can change over time. This makes it important to watch for changes in the interest rate and make sure your monthly payments are affordable.
HELOCs also typically have shorter terms than mortgages, which means you'll need to repay the loan more quickly.
The upside of a HELOC is that it can be a flexible way to borrow against your home equity. You can use the line of credit for a variety of purposes, and you only need to repay the loan when you use the money.
The downside of a HELOC is that it can be difficult to predict your monthly payments, since the interest rate can change. And if you don't repay the loan, you could lose your home.
A cash-out refinance is a type of loan that allows you to refinance your existing mortgage and take out a new loan for more than you owe on your home.
The difference between the two loans is paid to you in cash.
Cash-out refinances are typically used to consolidate debt, make home improvements, or pay for major expenses.
The upside of a cash-out refinance is that you can lower your interest rate and monthly payments. You can also use the cash from the loan for any purpose.
The downside of a cash-out refinance is that it can take years to repay the loan. And if interest rates rise, your monthly payments could become unaffordable.
Which Is the Best Option for You?
The best way to borrow against your home will depend on your needs and your financial situation.
If you need a large amount of money for a one-time expense, such as a home renovation, a cash-out refinance might be the best option.
If you need a flexible line of credit that you can use for a variety of purposes, a HELOC might be the best option.
And if you're looking for a long-term loan with predictable monthly payments, a mortgage might be the best option.
Whatever your needs, be sure to compare the interest rates, terms, and fees of different loans before you decide which one is right for you.