If you’re looking for a way to finance a home improvement project or consolidate debt, one of your best options may be a cash out refinance or home equity loan. Both of these options can provide the necessary funding you need, but what’s the difference between them and which one is the best solution for you?

Cash Out Refinance vs Home Equity Loan

Refinancing your home allows you to tap into the built-up equity, or the difference between the amount that you owe on your mortgage and the current market value of your home. In other words, if you owe $300,000 on your current mortgage, and your house is worth $400,000, then you have $100,000 in equity. With a cash out refinance, you’d be taking out additional financing by refinancing the original loan for more than you owe. This could provide you with up to 80 percent of the home’s value, depending on the lender’s requirements.

On the other hand, a home equity loan works much like a typical loan. You use your home as collateral, and the equity as your loan’s base. For example, if your home is currently worth $400,000 and you have a $300,000 mortgage, you could secure a loan for up to $100,000. With a home equity loan, you allow your lender to place a lien on your house, which allows them to take legal action should you be unable to make the payments.

Benefits of Cash Out Refinance vs Home Equity Loan

The biggest benefit of a cash out refinance is that it allows you to access your home’s equity more quickly than a home equity loan. You’ll also get to take advantage of the traditional refinancing perks. You could get a better interest rate, as well as a longer loan term. This means that you could get lower monthly payments or a shorter repayment period.

With a home equity loan, you’ll be able to access a larger sum of money than with cash out refinance, and you may also get a lower interest rate, depending on your creditworthiness. You also have the option of taking out a fixed rate or adjustable rate loan. With a fixed rate, you’ll be paying the same interest rate for the entire loan duration. With an adjustable rate, the interest rate can change over time.

Final Thoughts

In the end, the choice between a cash out refinance or home equity loan will come down to your unique needs and circumstances. A cash out refinance may be the better option if you have good credit and need access to your available equity quickly. A home equity loan may be the right choice if you need a larger loan amount and are willing to accept the higher interest rate of this type of loan.

Your best bet would be to discuss your specific circumstances with a financial advisor or mortgage specialist to determine which option is the best fit for your needs.