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FAQs About Trading In Your Home's Equity for Cash


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Note: Use a loan calculator to determine your payments when compiling this worksheet.

  Loan balance Interest rate (APY) Weight Wtd. APR (Int. rate x Wgt.) Monthly payments Total payments Notes
Scenario A: Home Equity Loan
Old mortgage $100,000 7.5% 2/3 5% $805.59 $193,342.37 20 years remaining
Home equity loan $50,000 7.55% 1/3 2.52% $515.98 $92,876.28 15-yr. fixed
  $150,000 Weighted rate: 7.52% $1,321.57 $286,218.65
 
  Loan balance Interest rate (APY) Weight Wtd. APR (Int. rate x Wgt.) Monthly payments Total payments Notes
Scenario B: Cash-Out Refinance
Refinance $150,000 6.96% 100% 6.96% $993.93 $357,813.87 30-yr. Fixed
 
  Loan balance Interest rate (APY) Weight Wtd. APR (Int. rate x Wgt.) Monthly payments Total payments Notes
Scenario C: Home Equity Line Of Credit
Old mortgage $100,000 7.5% 2/3 5% $805.59 $193,342.37 20 years remaining
HELOC $50,000 6.42% 1/3 2.14% $433.36 $78,004.39 15-yr Fixed
  150,000 Weighted rate: 7.14% $1,238.95 $271,346.76 Estimate

 

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You should be able to notice from the chart that home equity loans are paid off over shorter periods of time than mortgages, which creates an increase in the monthly mortgage payments. Since you can make additional principal payments on the refinancing to bring down the loan balance, you should also see that the shorter term of the home equity loan isn't an advantage.

Revolving credit in the form of a HELOC, home equity line of credit, allows you to pay off the building project and borrow against the line whenever needed without forcing you to take out another loan.

Note: The true benefit here is that the interest on any personal loan isn't tax deductible and the interest expense on a mortgage or home equity loan is usually tax deductible and thus you can save money by using the revolving credit line. Also remember that a HELOC is for people who have a good habit of making loan payments on time and not just for the minimums allowed. HELOCs do allow for lesser payments but that creates a balloon payment at the end, and if you are not able to cope with that financially, it will create more problems than you are solving. Also, the HELOC shown in the table is predicated on a rather unrealistic assumption; that the interest rate will not fluctuate, but it will pay off the loan over its 15-year term.

If you are able to take advantage of the interest-expense deduction on home equity loans, you should be able to make the same type of deduction on Cash-Out refinancing. Ask your financial advisor or accountant about this tax issue and see if it applies to your case.

3. When Is It a Smart Time to Refinance After Having Taken Out a Loan? Should I Wait or Does It Matter? As long as there is no fee or early payment penalty associated with your current loan there is no need to ever wait on refinancing if it suits your needs and will save you money or help you to achieve your new goals.
 
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