OnPath Credit Union

Can I Take Equity out of My Home Without Refinancing?

Yes, you can take equity out of your home without refinancing your current mortgage by using a home equity loan or a home equity line of credit (HELOC). Both options allow you to borrow against the equity in your home, but they work a bit differently.

A Home Equity Loan is what’s traditionally referred to as a “second mortgage” – or a secured loan for a fixed amount, at a fixed interest rate, with a set payment schedule. The loan is secured by the equity you have in your current home (what you’ve paid off/the portion of your home you own outright).

You receive the loan amount in a lump sum and pay it back over time. Borrowers who need funds for a specific, one-time expense may be well served by a basic home equity loan.

A Home Equity Line of Credit (HELOC) is more akin to a credit card with the credit limit being your equity. You are approved for a set credit limit that you can borrow against, repay and borrow from again during the draw period.

HELOCs typically have a variable interest rate, and you only pay interest on the amount you've drawn. Borrowers often prefer this over the lump sum second mortgage, which requires you to pay interest on the entire amount from the very start.

HELOCs could be a good option if you need flexibility to borrow money over time or if you're unsure how much money you'll need. Many households prefer this option due to its flexibility, interest savings and imposed incentive for responsible spending. If you treat it like a credit card and pay it back as you use it, you can avoid accruing a lot of interest.

Understanding the Importance of the “Secured” Part of Home Equity Borrowing Options

There are some unique risks involved with any secured loan, including home equity borrowing options. When you borrow against your home's equity, your home serves as collateral for the loan. If you fail to make payments, you risk losing your home.

Secured loans allow the average family to access greater funds than would normally be available with an unsecured personal loan or credit card, but there is some added risk. Borrowers should honestly assess their ability to repay the loan before taking out any kind of home equity loan.

Some HELOC borrowers can also take advantage of unique tax benefits. If the borrowed money is used to buy, build or improve the home that secures the loan, the interest you pay on a home equity loan or HELOC may be tax-deductible.

Do You Need Perfect Credit to Qualify for a HELOC?

Your credit rating will impact the interest you’re charged and your ability to get approved for any type of loan, including secured loans like auto loans or home loans. However, there’s a compelling argument for people with debt (especially credit card debt) to use home equity loans or HELOCs as a tool to consolidate debt.

These types of home equity borrowing options can be useful for restoring your financial stability and getting out of debt spirals. When combined with financial counseling and concerted changes in your spending habits, they may offer an accessible path toward getting debt free.

OnPath Federal Credit Union also offers competitive rates on debt consolidation personal loans for New Orleans residents who are interested in getting out from under their debt.

Why Do Some Borrowers Choose HELOCs Over Refinancing?

Closing Costs: Refinancing a home often comes with closing costs, which typically range from two to five percent of the loan amount. These costs can include application fees, origination fees and appraisal fees. People who are considering refinancing should make sure that the value of the equity their withdrawing, and the benefit of what they will use it for, outweighs these costs.

Longer Repayment Term: If you refinance to a new 30-year loan specifically to access equity, you’ll likely end up in a situation where you’ll be paying off your home over a much longer period than if you had kept your original loan. This will almost inevitably result in you paying more interest over the life of the loan, even if your able to secure a lower interest rate.

The credit-card-like attributes of a HELOC gives borrowers significant control over exactly how much they owe during the draw period, which means you have the opportunity to avoid a lot of that extra interest.

Prepayment Penalties: Some mortgages have prepayment penalties for paying off the loan early, which could occur if you refinance. Most HELOCs do not have prepayment penalties, but you should discuss the potential terms with one of our mortgage experts to learn more.

Private Mortgage Insurance (PMI): If the amount you owe on your home is more than 80 percent of its value, you might have to pay PMI. Many people who refinance have enough equity that they no longer need PMI – at least until they pull that equity out during the refinancing process. You should factor the added cost of PMI into your calculations if you need to start paying it again after withdrawing equity.

Less Equity in Your Home: If you do a cash-out refinance, you'll have less equity in your home. This increases your risk if home values fall, and it means you'll have less money from the sale of your home if you move.

Is a HELOC Right for You?

There are compelling arguments in favor of both refinancing and HELOCs. Talking with an experienced New Orleans mortgage professional might help you understand the pros and cons of both options, allowing you to make an informed decision based on what’s best for your financial situation. You can talk with one of our mortgage professionals by calling 504.648.2064.