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Cash-out refinance vs. home equity loan or line of credit

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If you’re interested in borrowing against your home’s equity, you have options. You could apply for a home equity loan (HELOAN) or a home equity line of credit (HELOC). Or you could apply to refinance loans secured by your home—typically your mortgage(s)—to get cash back. (This is commonly called cash-out refinancing.) Consider the pros and cons of each choice before making your decision.

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HOME EQUITY LOAN
You can convert some of your home equity into cash, and you pay back the loan with interest over time.
HOME EQUITY LINE OF CREDIT
You can draw money as you need it from a line of credit over a specific time period or term, usually 10 years.
CASH-OUT REFINANCE
You refinance your mortgage(s), paying off the original loan(s), taking on a new one and getting cash for some of the equity you have in the home.

How it affects your original mortgage:
No effect.
No effect.
Replaces it.

How you get the money:
Lump sum at closing.
You might use online transfers, checks or a credit card, depending on your lender.
Lump sum at closing.

The interest rate you pay is:
Usually fixed.
Note: A home equity loan typically has a higher interest rate compared to a home equity line of credit for the same amount.
Applied only to the amount of credit you use. It’s typically adjustable, although a portion may be fixed.
Applied to your new mortgage and may be fixed or adjustable depending on the type of loan you choose.

Tax perk! No matter which option you choose, the interest you pay may be tax-deductible.

Closing costs are:
Similar, on a percentage basis, to those you paid on your original mortgage.
Usually lower, though you might pay for things like an origination fee and appraisal.
Similar to what you paid on your original mortgage.

You pay it back:
With monthly payments of principal plus interest for the duration of the loan.
By making payments during the borrowing period based on your credit use. When your borrowing period ends, you may need to pay the balance in full or over a long time frame, typically 20 years.
With monthly payments of principal plus interest for the duration of the new mortgage.

Talk with your lender about your options to help you choose the best one for you.

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The material provided on this website is for informational use only and is not intended for financial, tax or investment advice. Bank of America and/or its affiliates, and Khan Academy, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional and tax advisor when making decisions regarding your financial situation.

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Credit and collateral are subject to approval. Terms and conditions apply. This is not a commitment to lend. Programs, rates, terms and conditions are subject to change without notice.

Bank of America and its affiliates do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.