Home Equity Loan vs. Refinance: Your Options to Access Equity

Written by Banks Editorial Team
3 min. read
Written by Banks Editorial Team
3 min. read

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Home equity loans and cash-out refinances are commonly used by homeowners to convert the equity in their homes to cash. But is one option better than the other? And how do you choose between the two?

You’ll discover the answer to these questions, along with a viable alternative to unlock your equity, in this informative guide. 

Access Your Home Equity

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Learn how Unison can help you leverage the equity in your home to unlock financial success without accumulating extra debt.
Learn how the Unison HomeOwner co-investment program can help you tap into your home’s equity to finance your lifestyle without added debt.

How Do You Calculate How Much Equity You Have in Your Home?

You can calculate the equity you have in your home by subtracting your outstanding mortgage balance and amounts you owe on any other loans against the home from the current market value. 

For example, if your home is worth $510,000 and you owe $350,000 on the mortgage, you have $160,000 in equity. Now, assume you take out a home equity loan for $50,000. In that case, you’ll be left with $110,000 in equity. 

How Can You Use Your Home Equity?

Here are some common ways homeowners use the equity in their home: 

  • Consolidate high-interest debt to streamline the repayment process and save a bundle in interest. 
  • Make home improvements without tapping into their savings account. 
  • Retire early and start living life on their own terms. 
  • Use the loan proceeds to make a down payment on a second property or pay for it in cash. 
  • Start a business and create another stream of income. 
  • Fund a big-ticket purchase instead of spending months or years saving up enough money.

Home Equity Loan vs. Refinance

A home equity loan acts as a second mortgage and lets you borrow a set percent of your home’s equity, minus what you still owe on the mortgage. Loan proceeds are dispersed in a lump sum and payable in equal monthly installments since the interest rate is fixed. 

A cash-out refinance is slightly different. You can use this loan product to tap into your home’s equity. However, you’ll get a single mortgage product as the amount you borrow and the current mortgage balance is rolled lumped together.

Key Similarities

  • You’ll generally need at least 15 to 25 percent in home equity to qualify for these loan products. 
  • You’ll get the loan proceeds in a lump sum with a home equity loan or cash-out refinance. 
  • There are no restrictions on how you can use the loan proceeds. 
  • If you default on the loan payments, the lender could foreclose on your home and sell it to recoup their losses.

Key Differences 

  • A home equity loan acts as a second mortgage. But a cash-out refinance that replaces your old loan with a new one that also includes the amount of equity you took out. 
  • You can expect a lower interest rate with a cash-out refinance, but closing costs may be higher than what you’ll get with a home equity loan.

Access Your Home Equity

5c99f6b46b6a57000135380dLoading TrustPilot
Learn how Unison can help you leverage the equity in your home to unlock financial success without accumulating extra debt.
Learn how the Unison HomeOwner co-investment program can help you tap into your home’s equity to finance your lifestyle without added debt.

Advantages and Disadvantages of a Home Equity Loan

Benefits:

  • You can consolidate high-interest debt, save hundreds or thousands of dollars in interest and possibly improve your credit score.
  • You can deduct interest paid to the lender if the funds are used to make upgrades to your home. 

Drawbacks:

  • Your loan is used as collateral, which means it’s at risk for foreclosure if you fall behind on payments. 
  • You’ll start paying interest on the entire loan amount right away, even if you don’t use all the funds for a bit.

Advantages and Disadvantages of a Cash-Out Refinance

Benefits:

  • The interest rates on cash-out refinances are typically lower than what you’ll get with a home equity loan or home equity line of credit (HELOC).
  • Like home equity loans, cash-out refinances also help you save a bundle on interest if you use the loan proceeds to consolidate. 

Drawbacks:

  • Closing costs are generally steeper than what you’d find with other home equity loan products. 
  • Your new monthly mortgage payment could be much higher than you can comfortably afford if you borrow a large sum of money or get a higher interest rate on the new loan product.

When Should You Use a Home Equity Loan vs. Refinance

A home equity loan could be sensible if: 

  • You’re looking for a smaller loan amount. 
  • You don’t mind making payments on two loans. 
  • You’d prefer to minimize your closing costs. 

However, it’s probably best to consider a cash-out refinance if: 

  • You’re seeking a lower interest rate on your current mortgage. 
  • You’re able to afford a higher monthly payment. 
  • You plan to stay in your home for an extended period.

Alternatives to Take Equity Out of Your Home

Let’s review some other ways to tap into your home equity. 

Home Equity Investment

Home equity loans, cash-out refinance loans, and HELOCs are all ways to unlock the equity in your home. Still, you’ll be on the hook for even more debt and put a strain on your finances.

Or you could consider a home equity investment from a company like Unison if you’d prefer to access your equity without taking on more debt. In fact, the Unison HomeOwner program gives you cash now in exchange for a percentage of the future increase or decrease in your home’s value. There are no monthly payments, and you’ll have up to 30 years to decide if you want to sell your home or buy Unison out. 

Learn more about Unison and how much of a co-investment you could qualify for by completing the online form. If your home is eligible, you could get approved for up to 17.5 percent of your home’s equity (limited to $500,000).

Home Equity Line of Credit

Like home equity loans, HELOCs also act as a second mortgage and let you tap into your home’s equity. But instead of getting the loan proceeds in a lump sum, you’ll have access to a pool of funds. You can make withdrawals up to the credit limit during what’s referred to as a draw period (typically not exceeding 10 years). 

Some lenders require you to make interest-only payments on the amount you spend during this timeframe. When the draw period ends, a new monthly payment amount that includes principal and interest is calculated. Be mindful that it could change over the repayment term as the interest rate on HELOCs is usually variable. 

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