I chose a cash refinance over a home equity loan.  here's why
I chose a cash refinance over a home equity loan.  here’s why
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A cash refinance loan offered benefits I couldn’t pass up.

Not so long ago, I decided to tap into the equity in my home. I had paid off a good portion of my mortgage and wanted to spend some of that money on other financial goals.

There are several ways to do this. For example, I could have taken out a home equity loan or a line of credit. But I went another route instead with a cash refinance loan. Here’s why.

Refi Loans Cashed Out vs. Home Equity Loans

First, it’s important to understand the difference between a cash refinance loan and a home equity loan.

A refinance loan with withdrawal consists of taking out an entirely new mortgage with different conditions. You will then use part of the proceeds to pay off your current loan. It’s called a “cash refinance” because you’re borrowing more than you currently owe. You would cover your existing balance and still have extra money.

For example, let’s say you owe $300,000 on your mortgage and take out a $350,000 refinance loan. You would use $300,000 to pay off your existing loan and walk away with the additional $50,000.

Home equity loans or lines of credit work differently. These types of loans do not affect your existing mortgage. You just take a Additional loan that is also secured by the value of your home.

So while both allow you to tap into equity, they are very different financial products.

Here’s why I opted for a cash-out refi

There are a few main reasons why I chose a refinance loan with withdrawal when I wanted to get money out of my house:

  • I was able to lower the interest rate on my current loan. It has lowered my mortgage costs over time. I couldn’t have done it if I had taken out a home equity loan unless I also refinanced in a separate operation.
  • I can make only one monthly payment. I didn’t want to complicate my financial life by owing money on my mortgage and another loan. With a refi cash-out, I still only have one monthly payment to make instead of two.
  • My interest will be tax deductible. Interest on home equity loans and lines of credit are only tax deductible if you meet certain conditions, such as using the money to improve the home. When you take a withdrawal refi, mortgage interest is still deductible — provided you itemize your taxes and your loan balance is below the $750,000 deductibility limit.
  • The collection refinancing rate was lower. Home equity loans and lines of credit tend to have higher interest rates than cash refinance loans. This is because they are sub-loans and the primary mortgage lender has a greater interest in the home. I didn’t have to worry about it with the cash-out refi, so I was able to get a floor rate.

Of course, there is a downside. I will pay off the refinance loan longer than with a home equity loan or line of credit. This could theoretically mean more interest charges in total, despite me qualifying for a loan at a lower rate.

In the end, the key benefits of a refinance loan made it the right choice for me. And if you want to tap into the equity in your home, it’s also worth considering — as long as you can lower the interest rate on your current loan in the process.

A Historic Opportunity to Save Potentially Thousands of Dollars on Your Mortgage

Chances are interest rates won’t stay at multi-decade lows much longer. That’s why it’s crucial to act today, whether you want to refinance and lower your mortgage payments or are ready to pull the trigger on buying a new home.

Ascent’s in-house mortgage expert recommends this company find a low rate – and in fact, he’s used them himself to refi (twice!). Click here to learn more and see your rate. While this does not influence our product opinions, we do receive compensation from partners whose offers appear here. We are by your side, always. See The Ascent’s full announcer disclosure here.


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