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Short Summary
Main recommendation: Choose among the cash out refinance, the HELOC (home equity line of credit), and the home equity loan based on your goal, and speak with a mortgage loan officer before deciding, since each has different pros and cons. The speaker compares the three by how much equity they allow you to access, how the payments work, and how the interest rates behave. The video also notes that the current housing market makes tapping home equity attractive.
Key Points
- A cash out refinance replaces your current mortgage with a larger loan and pays you the difference in cash, leaving you with one loan and one payment.
- A HELOC is a revolving line of credit secured by your property, working like a credit card: you can borrow, repay, and borrow again, and you owe nothing if you don't use it.
- A home equity loan is a second mortgage that works like an installment loan, giving you a lump sum with one fixed monthly payment.
- Based on the speaker's $500,000 home example, the cash out refinance allows up to 80% loan-to-value (about $100,000 cash from a $300,000 mortgage), the HELOC up to 90% combined (about $50,000 more), and the home equity loan up to 95% combined (about $175,000 more).
- The main risks are the HELOC's interest-only minimum payments and variable rates with no caps, and the cash out refinance's higher closing costs and possibly losing a lower existing interest rate.
Details Worth Noting
- Concrete instructions:
- Before tapping equity, get a current property appraisal to establish your home's value; the speaker used a recent appraisal of $500,000.
- Calculate loan-to-value as the mortgage balance divided by property value, times 100 (for example, $300,000 ÷ $500,000 × 100 = 60%).
- For a cash out refinance, estimate cash out as the maximum loan (80% of value for conventional or FHA loans) minus the current mortgage balance (for example, $400,000 − $300,000 = $100,000).
- For a HELOC, calculate combined loan-to-value (first mortgage plus second lien) against the 90% limit (for example, 90% of $500,000 = $450,000, minus $300,000 = $150,000 available, with a $50,000 extra compared with the cash out refinance example).
- Use a cash out refinance only if the money will pay off debt, be invested, or go into home improvements, and compare your current interest rate with the new rate, since the speaker's example moved from 2.5% to 4%.
- If you pick a HELOC, do not just make the minimum interest-only payment; the speaker warns that most HELOCs have a 10-year draw period followed by a 20-year repayment period, and payments rise sharply when principal is required.
- Consider a shorter-term refinance (15, 20, or 25 years) to pay off the new loan faster.
- If you are risk-averse, the speaker says not to choose a HELOC because its rates can rise without caps, potentially reaching 10–12% APR.
- Before deciding, consult a mortgage loan officer who can explain the best option for your situation.
- The speaker says refinancing out of an FHA loan into a conventional loan (not an FHA refinance) can remove the FHA mortgage insurance premium, which may save money over time.
- The VA loan allows veteran homeowners up to 100% of property value, but the speaker focused on the 80% and 90–95% options.
- Home equity loans can have 15- or 20-year terms, with higher interest rates than a cash-out refinance, and monthly payments a bit higher than a HELOC's; they suit borrowers wanting maximum cash rather than the lowest cost.
Bottom Line
The right choice depends on whether you need one lump sum with a fixed payment, flexible access to funds, or the lowest possible rate and payment, so compare the numbers for your own equity before committing.
