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The Difference Between a Cash-Out Refinance and a Home Equity Loan

Owning a home is great. You can take on home improvement projects as you please, and can use the equity in your home to pay off debt, finance a college degree, or simply save for the future. The way you plan to use those funds can help you decide between an equity loan or cash-out refinance.

Home Equity Loans are Easy
Do you have equity in your home? If you’ve lived there for more than a few years, you might. To calculate yours, subtract what you still owe on your home from the property’s current value. If you come up with a positive number, you probably have some equity. Depending on how much equity you have, it could be worth applying for a home equity loan.

To apply for a home equity loan, visit your local First Tech experience center where we will help you fill out an application and walk you through the loan process. Some lenders charge an annual fee for home equity, so be sure to ask question about costs and fees on these loans.

Cash-out Refinance Loans Explained
If the value of your home has gone up or if you could move to a lower interest rate, then you’re a candidate to refinance your home. When you refinance, you typically end up paying less every month thanks to a combination of lower rates and/or extended terms. A refinance loan can also help you pay off your loan sooner by maintaining the current monthly payment for a shorter amount of time.

A cash-out refinance works the same way, but you won’t likely see any savings in your monthly payments. Instead, you’ll get a new home loan the covers what you still owe plus a certain percentage of your available equity. You get the equity in cash, and that amount is financed into your new home loan.  

While a cash-out refinance might not save you anything on your monthly payments and there will be closing costs and other fees to finalize the loan, it can be a cost-effective way to finance a new kitchen remodel or other purchase. Plus, the interest you pay on the new loan, which includes the cash, could be tax-deductible.

“The equity in any home is a wonderful tool,” stated Melissa Bedard, Senior Product Development Manager with the First Tech Federal Credit Union home loan team. “Just be careful to look at all the costs of equity loans and refinance loans before choosing a lender.”

Where to Start
Give your local First Tech loan officer a call to discuss the options best for you. We can answer any questions you have, and get you started on the right path to make the most of your home equity.