Juggling the finances of homeownership can be tricky. While your wealth can grow through the rising value of your home, this doesn’t always translate to an ability to pay regular expenses or home maintenance. However, there are multiple options for flexing your mortgage or home equity to work better for your finances in the present and into the future. We explain the differences between the most common loan and refinancing options below. Remember to always check in with a financial advisor or mortgage loan officer to find out the specifics for your financial institution.

Home Equity Loan

Commonly referred to as a second mortgage, a home equity loan can come from your current mortgage lender or a different lender. The loan will provide a lump sum upfront which is paid back in monthly installments, similarly to the primary mortgage. Payment schedules are usually 10 to 15 years. Loans are calculated with compounding interest – the same as a first mortgage – which means that most of the payment covers interest for the first half of the loan term.

Good if: You need a large lump sum of money and don’t expect to draw equity again soon.

Be Careful if: You are not sure you can make both the primary mortgage and home equity payments. As a lien holder, the home equity lender can foreclose even if you are current on the primary mortgage.

Reconsider: Using a home equity loan to pay off other debts, especially car, credit card, and personal debt. You always want to be cautious about using long-term secured debt like a mortgage to pay off short-term or unsecured debt.

Home Equity Line of Credit (HELOC)

Best described as a credit card tied to your house. Your equity line is like the spending limit on a credit card: you can use as much or as little of it as you chose. Monthly payments are based on the amount of equity borrowed the previous month. HELOCs also allow interest only monthly payments. Interest is calculated as simple interest rather than compounding interest like is used on a mortgage payment. This can mean less interest is paid over time.

Good if:

1. You want a reserve of credit you can tap into when needed.
2. You have a long-term project with periodic expenses
3. You are looking for a more flexible monthly payment

Be Careful if:

1. You struggle managing credit card debt
2. You cannot afford to pay the full monthly payment

Reconsider: While some people suggest using a HELOC to pay off a primary mortgage in order to take advantage of the simple interest and flexible payment options, it is easy to run into issues. Firstly, the HELOC would not have an escrow account, so you would have pay taxes and insurance on your own. Secondly, you will not make progress on the debt if you are only making minimum interest-only payments. The lender can require you to start to pay principal as well as interest, which can cause a dramatic increase in monthly payments.

Cash Out Refinance

A cash out refinance is a new mortgage loan which replaces your existing mortgage. The existing mortgage is paid off entirely and any remaining equity is either used to pay off other debts at closing or paid directly to you in cash. A refinance resets your payback schedule. No matter how close you were to paying off the existing mortgage, you start again on day one on the new loan.

Good if:

1. A reduction in interest rate or term makes the mortgage payments lower than they were.
2. You only want one payment to deal with, as opposed to the two that would result from a home equity loan or HELOC

Be Careful:

1. If you are interested in paying off your mortgage as soon as possible. A refinance resets your payment schedule which means more interest over the life of the loan.
2. Costs and fees are rolled into the refinance along with the equity you are borrowing. Make sure you can afford the new mortgage payment.

Reconsider if: You are looking to pay off short-term or unsecured debt. Any debt that is paid off becomes part of the mortgage and is paid over the 30-year schedule of the mortgage, resulting in more total interest.

Reverse Mortgage

A reverse mortgage is a loan for homeowners 62 years of age and older. It allows homeowners to borrow equity without monthly payments. Borrowers have options for receiving money, including monthly payments or a line of credit. The loan is due in full when the borrower permanently leaves the home or passes away. Counseling is required to be eligible for the loan.

Good if:

1. You intend to stay in the house for the long run
2. You want access to equity without monthly payments
3. You want to pay off an existing mortgage that you can no longer afford

Be Careful:

1. If you cannot pay your taxes or insurance. That is considered a condition of default and can result in the loan being called due.
2. Costs and fees are higher than any other equity borrowing. They can total to up to 5% of the value of the home
3. The loan balance continues to collect interest and grow as long as the loan is in place.

Reconsider if: You want to pass the home or equity to your heirs.

Unsecured Home improvement loan

An unsecured home improvement loan does not place a lien against your property and is similar to a personal loan.  Terms on the loan may vary by lender, and some lenders may require the funds to be used for a specific project within a set time frame.  Lenders may require a scope of work by a licensed contractor before making the loan.  Unsecured home improvement loans are typically smaller in dollar amount. They usually are not allowed for structural or foundation work or building extensions to the existing property.

Good if:

1. You have a smaller home improvement project and plan to pay the loan off quickly.
2. You do not want a lien placed against the property.

Be Careful:

1. 1. The lender may have stricter credit requirements than some secured loans because the loan is unsecured.
2. Lenders may require the project to be completed within a set period of time, so make sure you are able to work within this timeline.

Reconsider if: You have a larger, more complicated project or require work done to structural elements of the house.