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Home Equity Loan vs. Cash Out Refinance: What Is The Difference?

Two of the most often confused terms when it comes to mortgages are “home equity loan,” and “cash out refinance.” One the surface, it’s easy to understand why – both are used to access equity tied up in one’s home. The reasons to pursue either range from wanting to complete a kitchen renovation, to roof repair or paying down credit card debt or a child’s college tuition.

Home Equity Loan Cash Out Refinancing
Often dubbed a “second mortgage” New mortgage, replacing your previous one
Fixed rate interest, fixed-term payback time Your equity is taken out as cash

As illustrated above, the biggest difference between a Home Equity Loan and Cash Out Refinancing is that a Home Equity Loan is on top of your current mortgage, and Cash Out Refinancing replaces your current mortgage. Both boast the tax advantages of being able to deduct money paid toward interest (up to $100,000 for a married couple). If you are considering going after either of these financing options, keep in mind that your credit score will affect the interest rate you are offered.

Additionally, in Texas, when you take cash out of your mortgage, you have to leave at least 20% equity, so keep this in mind as well, ensuring that you’ve saved up enough money to cover the project you’ve planned, and that base amount.