Many homeowners have reached out to me the past few months asking how best to to tap into their home’s equity and get a cash out loan. The reasons are multiple, but they are usually for one of the following reasons:

  • home improvement projects
  • pay off debt
  • to use the funds as down payment on a rental property or vacation home purchase

When you want to tap into your home’s equity, you essentially have two options:

  1. Do a cash-out refinance, where you pay off your existing 1st mortgage and get the cash from the new loan
  2. Keep your existing 1st and get an equityline

Here are the advantages and disadvantages of both –

Getting cash out via refinancing your 1st mortgage

  • Advantage is that you will have a fixed, secure payment. Your rate and payment will not adjust in the coming months and years.
  • Disadvantage is that you will (most likely) be losing your current lower rate. This does assume you purchased or refinanced during lower-rate markets.

Getting cash out via an equityline

  • Advantage is that you keep your existing (lower) rate on your 1st mortgage. You can request any equityline amount you want, and like a credit card, your payment is based on the balance that you have drawn. For example, you can request a $200k equityline, but if you only draw $50k on it, then your payment is based on the $50k. As you pay the equityline down, your payment adjusts based on the new balance.
  • Disadvantage is that the rate is adjustable based on Prime, and we are in a rising rate market right now. In addition, the minimum payment due is interest-only. This can be both a good and bad thing, but definitely bad if you only make those minimum payments.  Prime is currently 5.25%, but more rate hikes are anticipated.

The best way to think through your options is to look at the numbers. I will assume the following as an example:

Susie currently has a 30 Year Fixed rate at 3.75% with a loan balance remaining of $380,000. She is seeking cash out of $200k to expand on her home. Her current mortgage payment is $2084.02.

For the cash-out refinance option, the new loan amount would be $580,000. The current 30 Year Fixed cash-out refi for her scenario is 4.875% with no points (APR 4.92%).

The new mortgage payment will be $3069.41, an increase of $985/month.

Now, to review the equityline:

A good rate/margin is Prime + 0%. Prime is currently 5.25%, so for the time being, let’s say she will be paying the equityline back at 5.25%, although do note this can (and will) increase.

She would draw on the $200k equityline, so the interest-only payment at 5.25% will be $875.

Monthly cash-flow wise, Susie would be saving $110 in electing the equityline, BUT it is very important you know that this is an interest-only payment AND that Prime is scheduled to increase. As Prime increases, that payment savings dwindles.

At this payment difference, I would recommend the cash-out refinance; however, there are sometimes instances where the payment difference is much more significant and drastic, so the decision is harder to make. I can help talk that through for your personal scenario, so if you are looking for cash out on your home, reach out to me and I can help analyze the numbers and cost/benefit for each option.