Alternatives To A Cash-Out Refinance
October 15, 2018I recently wrote about cash-out refinancing to tap into the equity in your home including the pros and cons of doing so. Today I want to explore some alternatives to the cash-out refinance if you decide the bad outweighs the good in your situation. Let’s look at a few options that are available.
Take out a personal loan
A personal loan is an unsecured loan from a bank or credit union. Often the interest rates are higher than an equity-based loan because you are not using your home to secure the loan, so the bank is taking on more risk. The upside is that you aren’t putting your home at risk should you default on the loan payments.
Use a credit card promo offer
If you are tackling a small project, you could also use credit card promotional offers such as offering your 0% for a certain amount of time. Be careful here though – you want to make sure the debt is paid off before the offer expires and high interest rates take over, so make sure you can afford the monthly payment required to make that happen.
Consider a second mortgage
A second mortgage (sometimes called a home equity loan) allows you to borrow against the equity in your home without having to change the terms of your original mortgage. So you can still tap your equity but you wouldn’t have to forfeit a great interest rate or reset the payment term. If you set up a 10-year term on the second mortgage for instance, after 10 years, you will be back to where you would have been before the loan in terms of your primary mortgage. This option often makes more sense if you’re using the proceeds to fix up your home, as the interest will still be deductible.
Look into a HELOC
A home equity line of credit (HELOC) is similar, but often comes with a variable interest rate that may increase over the life of the loan. The difference is that you only use as much of your equity as you need, rather than taking one lump sum as you do with a home equity loan. Both options will use your home as collateral, so make sure the payment fits your budget before moving forward.
Don’t forget a student loan for education
If you are looking to use the money to pay for education, consider a federal student loan to fund that instead of your home’s equity. Not only do they offer flexible repayment options and are designed specifically to pay for education expenses, if you run into a situation where you’re unemployed or have other hardships, you may even be able to put the loan into forbearance, which you can’t do with a home-based loan.
Explore a small business loan
If your goal is to fund a business opportunity, then a small business loan may make sense. This takes your home off the table should the business not pan out. Explore options for loans backed by the Small Business Administration to help keep the interest rates more reasonable.
Hopefully this series helps you weigh if a cash-out refinance is right for you, and presents some alternatives to help you make an informed decision on your cash needs and options!