How to tap home equity

Homeowners who want to take advantage of the equity they’ve built up in their home may have to consider alternatives to the traditional home equity loan and home equity line of credit.
Home equity loans and lines of credit, or “HELOCs,” tap the homeowner’s equity and can be used to make home improvements, consolidate other debts, pay off medical bills or help to finance a college education, among other needs.
In today’s market, however, HELOCs have become much more difficult to obtain. Lower home values have reduced many homeowners’ equity, and some lenders have decided to limit their risks on these types of loans. That means some homeowners may want to consider alternatives to a home equity loan or HELOC to access their home equity.
Alternatives to home equity loansOne alternative is a cash-out refinance, which allows you to refinance your first mortgage and take out cash for other financial needs.
Here’s how a cash-out refinance works:
Suppose your home is worth $250,000, and you owe $150,000 on your mortgage. Rather than try to get a HELOC with a limit of, say, $30,000, you could refinance your mortgage with a new $180,000 loan and get $30,000 cash that way.
Since a cash-out refinance is a new loan, you’ll have to pay closing costs, and you’ll have a new loan term, typically 15 or 30 years. Of course, you can pay off the new loan sooner if you’re willing to make higher payments at least some of the time.
Cash-out refinance may offer a lower interest rate
A cash-out refinance doesn’t offer the flexibility of a HELOC, but the interest rate on a new loan may be lower than the rate you’d be offered on a second mortgage, and both the interest rate and monthly payment on the new loan may be fixed, rather than adjustable. Most HELOCs have an adjustable interest rate, which means the rate and payment can change. Depending on the terms of your existing loan, you might have a lower payment on a new loan even if you cash out equity.