Question:  “I need cash out from my home equity for home repairs or debt consolidation. Should I refinance my existing mortgage or take out a home equity line of credit or second mortgage?”

Answer:  Deciding whether to refinance your existing mortgage, take out a home equity line of credit (HELOC), or opt for a second mortgage depends on your financial situation, goals, and the current state of your mortgage. Here’s a breakdown of each option to help you decide:

How it works:

You replace your current mortgage with a new one for a higher amount than what you owe. The difference is given to you as cash.

Best for:

• If current mortgage rates are significantly lower than your existing rate or lower than a ‘blended’ rate, if also considering a higher-rate second mortgage.
• For debt consolidation, this could lower your blended fixed rates and payments overall, open up monthly cash flow, and reduce interest payments.
• You need a large sum of cash for major expenses like home renovations.

Pros:

✅ Potentially lower interest rate if rates have decreased.
✅ Single monthly payment.
✅ Fixed interest rate if you choose a fixed mortgage.

Cons:

❌ Higher closing costs than a second mortgage, even though generally not out of pocket other than the appraisal fee (however, we can discuss how no-cost mortgages work and show all options).
❌ Your mortgage term may reset (e.g., from 15 to 30 years).
❌ You may lose your current favorable mortgage terms if rates are higher now.

How it works:

You get a revolving line of credit based on your home’s equity, similar to a credit card. You can draw funds as needed during the draw period.

Best for:

• Ongoing expenses or projects (e.g., multiple more minor home repairs).
• You prefer flexibility and don’t need a lump sum upfront.
• If you have a very low first mortgage rate and the blended overall rate is lower.

Pros:

✅ Pay interest only on what you borrow.
✅ Flexible access to funds.
✅ Lower upfront costs than refinancing.

Cons:

❌ Variable interest rates (payments can increase).
❌ Risk of overspending due to revolving credit nature.
❌ Payments may increase significantly after the draw period ends.

How it works:

You take out a separate, fixed-term loan against your home’s equity, in addition to your primary mortgage.

Best for:

• A large one-time expense (e.g., debt consolidation, major home repairs).
• You want predictable payments and a fixed interest rate.
• If you have a very low first mortgage rate and the blended overall rate is lower.

Pros:

✅ Fixed interest rate and predictable payments.
✅ Lower closing costs than refinancing.
✅ Keeps your current mortgage untouched.

Cons:

❌ Adds a second monthly payment.
❌ Typically higher interest rates than primary mortgages.
❌ Your home is used as collateral, increasing foreclosure risk if you can’t repay.

• If mortgage rates are lower than your current or blended rates and you need a large sum of money: Go for a cash-out refinance.
• If you need flexible access to funds over time: Choose a HELOC.
• If you need a one-time lump sum with fixed payments: Opt for a home equity loan (second mortgage).

Additional Factors to Consider:

• Closing Costs: Review all rate options to compare recapture math from no-cost refinance loans to some with costs and other rate options.
• Current Mortgage Rate: Compare your existing rate with today’s rates.
• Credit Score: Better rates are available with higher credit scores.
• Loan Amount and Duration: How much money do you need, and how long will it take to repay?

If you would like help running some numbers for you based on your mortgage balance, interest rates, and equity, just complete this form, and one of our team members will create a custom loan comparison worksheet.