Your home is probably your largest asset, so it only makes sense that you’d want to use it as collateral when taking out a loan. However, there are a few different ways to do this, and each has its own pros and cons. Here’s a rundown of taking out a home equity loan vs. getting a second mortgage vs. getting a cash-out refinance.
Home Equity Loan
A home equity loan is a loan that’s secured by your home equity, or the difference between your home’s value and your mortgage balance. Home equity loans can be a great way to get a lump sum of cash to use for major expenses, such as home renovations or repairs, medical bills, or college tuition.
There are two types of home equity loans: fixed-rate and variable-rate. fixed-rate home equity loans have interest rates that stay the same for the life of the loan, while variable-rate loans have rates that can fluctuate.
Pros:
• You’ll get a lump sum of cash that you can use for anything you want.
• Home equity loans usually have lower interest rates than unsecured loans, such as personal loans or credit cards.
• The interest you pay on a home equity loan is usually tax-deductible.
Cons:
• If you default on your loan, you could lose your home.
• Home equity loans can be difficult to qualify for if you don’t have a lot of equity in your home.
• Home equity loans typically have shorter repayment terms than first mortgages, so you’ll need to be sure you can afford the higher monthly payments.
Second Mortgage
A second mortgage is a loan that’s secured by the equity in your home, just like a home equity loan. However, second mortgages are typically taken out in addition to your first mortgage, and they have a shorter repayment term than a first mortgage.
Pros:
• Second mortgages usually have lower interest rates than unsecured loans, such as personal loans or credit cards.
• The interest you pay on a second mortgage is usually tax-deductible.
• You may be able to get a second mortgage even if you don’t have a lot of equity in your home.
Cons:
• If you default on your loan, you could lose your home.
• Second mortgages typically have shorter repayment terms than first mortgages, so you’ll need to be sure you can afford the higher monthly payments.
• You’ll need to get approved for both a first and a second mortgage, which can be difficult to do if you have bad credit.
Cash-Out Refinance
A cash-out refinance is a new loan that’s larger than your current mortgage balance. The difference between your new loan and your mortgage balance is paid out to you in cash.
Pros:
• You can use the cash for anything you want.
• Cash-out refinances usually have lower interest rates than unsecured loans, such as personal loans or credit cards.
• The interest you pay on a cash-out refinance is usually tax-deductible.
• You may be able to get a cash-out refinance even if you don’t have a lot of equity in your home.
Cons:
• If you default on your loan, you could lose your home.
• Cash-out refinances typically have shorter repayment terms than first mortgages, so you’ll need to be sure you can afford the higher monthly payments.
• You’ll need to get approved for a new mortgage, which can be difficult to do if you have bad credit.