If you’ve owned your home for five years or more, it’s possible that you’ve built up a sizeable amount of equity. This means you have access to multiple forms of low-interest financing that can help you pay for significant investments – everything from remodels to new cars to a college education.

Fortunately for you, using your home equity as collateral opens up a variety of financing options. You could use your equity to access a home equity line of credit (also known as a HELOC), a second mortgage, or a cash out refinance.

Home equity loans and lines of credit are the more commonly known options, so it’s important to explore the other alternatives. All of these financing tools have pros and cons, so read through the descriptions below to determine which option offers you the most benefits.

Home equity line of credit (HELOC)

A home equity line of credit tends to be the most popular way to access money through home equity. As you’ll see below, its advantages tend to outweigh its disadvantages.

Pros to a home equity line of credit

• This option offers a streamlined approval process, different from that of taking out another mortgage or refinancing. Most lenders have a low- or no-cost application process that can be completed in less than a day.
• HELOCs are easy to use. If you know how to write a check or swipe a credit card, you can access the funds in your home equity line of credit.
• You only pay interest on the amount of money you withdraw. Outside of the minimum that may be required by your lender, you can use as much or as little of your credit line as you want.
• HELOCs provide you with a readily available source of cash should you ever need it, yet prevent you from having to pay immediate interest on the entire amount.

Cons to a home equity line of credit

• The interest rate on a home equity line of credit is variable. Interest is calculated daily and will cause your monthly payments to vary.
• HELOCs can be just as damaging as credit cards. If you don’t have wise financial habits, you risk withdrawing more money than you can afford.

Second mortgages

A second mortgage offers you a one-time lump sum payment that comes at a fixed interest rate. Second mortgages are wise options to pursue if you already have an excellent rate on your first mortgage. This is because by default, a second mortgage will have a slightly higher rate than your first mortgage.

Pros of second mortgages: 

• A second mortgage makes it possible for you to utilize the equity you have on your home without touching (or raising) the interest rate on your first mortgage.
• If you’re concerned about the variable interest rates that come with some types of loans (HELOCs included), the fixed rate and set payments of a second mortgage may be a more attractive option to you.
• The interest you pay on a second mortgage is tax-deductible, just like the interest you pay on your first mortgage.

Cons of second mortgages:

• When you take out a second mortgage, you begin paying interest on the entire balance from the get-go. This happens whether or not you have an immediate use for the money.
• A second mortgage means you’ll have two monthly mortgage payments to juggle.
• You will no longer be able to pull equity out of your house without refinancing your first mortgage.

Cash out refinancing

A cash out refinance is a way to refinance your existing mortgage at a lower rate. You are then able to take the cash value of the difference between your original mortgage and your new, lower mortgage.

Pros to cash out refinancing:

• This option actually provides you with the largest selection of lenders and services from which to choose.
• Going through a cash out refinance leaves you with a set amount of money but only requires that you make one mortgage payment per month.
• A cash out refinance will typically provide you with the lowest interest rate for your additional funds than you would get through a home equity loan, a HELOC, or a second mortgage.

Cons to cash out refinancing:

• Associated and extra costs tend to run high with this option.
• The term of your loan will start over when you refinance everything into a new loan.

Review your options and get your questions answered upfront

If you’re considering any of the above options as a way to access your equity, be sure you understand the repercussions of each. It’s a good idea to sit down with a financial advisor from your lender’s office who can walk you through the details. Doing so will help you better understand which choice is best for you.