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Which is best: HELOC, 2nd mortgage, or cash out refi?
If you've been in your home for a significant amount of time, it's likely that you've built up some equity. It's become increasingly common to utilize the equity to pay for things like college, a wedding, or home improvements.
So which is best for you? The short answer is that HELOCs are the most flexible and the best alternative in many cases, but there are a few cases where 2nd mortgages and cash out refis are better.
Home Equity Line of Credit
Home Equity Lines of Credit (HELOC) are the most flexible and popular. Their only main drawback is a variable rate.
Upside
- Easy to use. Drawing against your credit line is as easy as writing a check or using a credit card.
- Use as much or as little you want. You only pay interest on what you draw against the line.
- Streamlined approval process. Many lenders offer a low or no cost application process.
- Can provide peace of mind. A HELOC gives you a readily available source of funds should you need it.
Downside
- Interest calculated daily. In a rising interest rate market, monthly payments can vary from month to month.
- Like credit cards, those with loose spending habits can get themselves into trouble quickly.
2nd Mortgages
Second mortgages provide a one-time sum of money at a fixed rate. If you have a very attractive first mortgage and want a fixed rate on your second, this may be the best option. HELOCs are generally a better choice, however, if your borrowing needs (for more money or less) are likely to change.
Upside
- Fixed rate and payments make for a safer option for those concerned about variable rate loans.
- Allows you to keep the existing rate on your first mortgage while still pulling out equity.
Downside
- You begin paying interest on the entire balance from the time the loan is funded, whether or not you use the money right away.
- No ability to pull more money out without refinancing.
- Two monthly mortgage payments.
Cash Out Refinance
If you can refinance your exisitng mortgage at a lower rate and you need a fixed amount of money, a cash out refi may be the best option.
Upside
- Only one monthy mortgage payment to make.
- Largest selection of products and lenders to choose from.
- Of the three options, usually provides the lowest interest rate for the additional funds.
Downside
- Like all refinances, your loan term starts over with the new loan.
- Associated costs are highest with this option.
Since there are so many options for using your homes equity, you should consult with an ethical mortgage broker to discuss which option is best for you.