Cash-out, or a second mortgage?

A HELOC is a credit line secured by your home. During the draw period, often around 10 years, you borrow as you need and usually pay on what you have used. Then the repayment period starts, when you cannot borrow more and payments are often much higher.

Most HELOCs have a variable rate, so the payment can change month to month. Some let you convert part or all of the balance to a fixed rate. If your home's value drops significantly, the lender can freeze or reduce the line.

A home equity loan is simpler: one lump sum, a fixed rate and a set payoff schedule.

For example, suppose you owe $250,000 at a low rate and need $50,000.

• Cash-out: all $300,000 moves to today's cash-out rate.
• Second mortgage: $250,000 stays at your current rate, and only $50,000 is at the second's rate.

Weight each rate by its share: five-sixths at your current rate, one-sixth at the second's. If that blend is below the cash-out rate, the second costs less in interest. With a variable-rate HELOC, also ask what happens if its rate rises, and whether you will pay it down or carry it for years.

• Conventional cash-out: you have been on title at least six months, and the mortgage being paid off is at least 12 months old.
• FHA cash-out: generally, you have owned and lived in the home for 12 months, with on-time payments.
• VA cash-out: you must live in the home, and it can replace a non-VA loan.

All of them need an appraisal and full income and credit approval. Ask a tax professional before you rely on a deduction; IRS rules limit when home equity interest is deductible.

• A one-time project with a known cost: a home equity loan or a cash-out gives a fixed amount at a set rate.
• Costs that come in stages, or an emergency reserve: a HELOC lets you borrow only what you use.
• Paying off credit cards or a car: it can lower the rate, but it turns unsecured debt into debt tied to your home, often over a longer time. Compare the total interest, not just the payment.