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Cash-out refinance vs home equity loan: which is better?

When to use a home equity loan

A home equity loan makes sense if refinancing your mortgage would force you to get a significantly higher interest rate. But keep in mind that the high interest rate that comes with home equity loans may not be worth it either. It is best to calculate beforehand to determine if a home equity loan makes financial sense for you. For instance, you may find that a home equity line of credit (HELOC) makes more sense.

Kyle Enright, President, Lending, at Achieve, told Mortgage Professional America in an interview that whether it’s better to have home equity or cash depends on several factors.

“One is how much equity you have in the home—and what you would use the cash proceeds from your home equity for,” Enright explained. “Depending on their location, many people who’ve owned their homes for some time have built up a large amount of equity. Consider that the national median home price in February 2020 was $270,100. Last month, it was more than $402,000. That’s close to a 50% increase in just three years.”

Enright added: “For homeowners who are carrying high-interest credit card and other debt—and who have substantial home equity—accessing that equity to pay off that debt could be a very smart move. Homeowners need to do the math to make sure that they are obtaining enough savings to make dipping into home equity worthwhile.

“Beyond paying off high-interest credit card debt, other uses for the funds can make good sense (e.g., medical expenses, home repairs, maintenance, renovations, remodels). For people without an emergency fund, using the funds to help build a fund can be a good idea.”

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