Refinancing by withdrawal or home equity loan: which one to choose?
Refinancing by withdrawal or home equity loan: which one to choose?

Our goal at Credible Operations, Inc., NMLS Number 1681276, hereafter referred to as “Credible”, is to give you the tools and confidence you need to improve your finances. Although we promote the products of our partner lenders who pay us for our services, all opinions are our own.

Cash-in refinance and home equity loans can both help you turn your home equity into cash. One replaces your existing mortgage, while the other is a second loan. (iStock)

If you’re looking for a way to tap into the equity in your home, refinances and home equity loans are two of your options. Both allow you to turn the equity in your home into cash for home improvements, debt consolidation, or other expenses. However, the process for getting them – let alone paying them back – is slightly different.

What is a cash refinance?

A cash refinance replaces your existing mortgage with a new one. Your new loan will be larger than your current loan and you will take the difference between the two cash balances.

The requirements for a cash-out refinance depend on your mortgage lender and your loan product, but, in general, to qualify for a conventional loan, you will need at least:

  • Credit score: 640 to 700
  • Debt to income ratio: 36% to 45%
  • Equity: 20%

If you’re currently looking to do a cash-out refinance, Credible can help you with the heavy lifting. You can compare refinance rates and terms from multiple lenders in one place. Get prequalified in just minutes and start saving on interest today.

What is a home equity loan?

A home equity loan is a type of second mortgage. These are loans against the equity in your home, and once you close, you will get the balance of the loan in cash. You will then pay it off (in addition to your existing mortgage) month after month until you have paid in full.

Again, the minimum requirements for a home equity loan vary by lender, but here’s what you can generally expect:

  • Credit score: 620
  • Debt to income ratio: 43%
  • Equity: 15 to 20%

Learn more: Personal loan or home loan: which is better?

How cash refinance and home equity loans are similar

Cash refinances and home equity loans allow you to turn the equity in your home into cash.

Apart from that, they also have the following points in common:

  • You can use the product as you see fit. There’s no limit to how you can spend your money once you’ve taken out the loan.
  • You are paid immediately. You will receive a lump sum payment regardless of the product you choose.
  • You will repay the loan monthly. Either way, you’ll pay off your loan monthly, just like your current mortgage.

How cash refinance and home equity loans are different

The main difference between these two options is that cash-out refinancing only requires one monthly payment, while home equity loans require two (your existing mortgage plus the home equity loan payment).

Here are some other differences between the two products:

  • Interest rate: Cash refinances can have lower interest rates than home equity loans.
  • Closing costs: With home equity loans, your lender will typically pay a large portion of your closing costs. This is not the case with cash refinances.
  • Impact on the original loan: A cash refinance completely replaces your existing mortgage and its monthly payment. A home equity loan is an additional mortgage on top of your current loan.

Always do your homework before taking out a new loan. Credible can help you find reputable lenders for your next refinance so you can ensure you get a great rate and quality service. Visit Credible today to explore current refinance options and find a loan that’s right for you.

When to choose a cash refinance

A cash-in refinance might be your preferred option if:

  • You only want one monthly payment. If you can’t afford a second monthly payment on top of your primary mortgage, a cash refinance may be your best bet.
  • You want a lower interest rate. Cash refinances usually come with lower interest rates than home equity loans. If interest rates are lower than your current loan, you’ll save even more.
  • You are looking to consolidate your debts. Since cash refinances come with low interest rates, they can be useful for consolidating higher interest rate debt like credit cards and personal loans. You would use the cash portion of your loan to pay off those balances, then take advantage of the much lower interest rate on your mortgage instead.

Consider using an online marketplace like Credible when looking for a cash refinance. They can help you get a great rate and a lender that’s right for you.

When to Choose a Home Equity Loan

Generally, a home equity loan will work best for you if:

  • You are satisfied with the terms of your current mortgage. If a cash refinance means getting a much higher interest rate than your current rate, a home equity loan may be a better option.
  • You plan to sell the house in the short term. Since refinances incur higher closing costs, they might not make sense if you plan to sell soon (you might not recoup the expenses until then). In this scenario, a home equity loan may be best.
  • You only need a small amount. Due to the higher closing costs on refinances, home equity loans are also better for smaller expenses, especially if you know you can pay them off quickly.

An alternative to cash refinance and home equity loans

HELOCs – or home equity lines of credit – are a third way to tap into the equity in your home. These are similar to home equity loans in that they are borrowed in addition to your existing mortgage. The difference is that your funds are not distributed to you in a lump sum.

Instead, HELOCs work more like credit cards. You can withdraw funds from your line of credit as needed, usually over a 10-year period. Once this period expires, you will begin to pay back the money spent, plus interest.

A HELOC is generally preferable if:

  • You are not sure how much money you need or want to use it for various expenses. HELOCs allow you to withdraw cash when you need it, much like a bank account or credit card.
  • You are comfortable with a variable interest rate. Unlike refinances and home equity loans, HELOCs typically come with variable rates that can increase over time.
  • You don’t want to start repaying the loan right away. You won’t start paying off the balance until your drawdown period expires, usually around 10 years.

If you’re hesitating between a home equity loan or a HELOC or a cash refinance, be sure to consider your goals, budget, and unique financial situation. All three options can be smart ways to access your home equity.

Keep reading: Home Equity Loan vs. HELOC: Which is Better?


Please enter your comment!
Please enter your name here