Help - Cash out refi vs. HELOC or home equity loan

[donthasslethehoff]

We're going to refinance through our current mortgage company mostly out of laziness because they require very little paperwork and no fees other than title, notary title insurance. I realize I could probably get a better rate if I shopped around, but I don't feel like doing that, so bear with me here. 

• We currently have 25 years and 2 months left of payments on our mortgage (we've been in the house just about 5 years)
• We owe roughly 350K and the house is worth (based on comps) around $650K
• Current interest rate is 3.5%
• Both of our credit scores are around 815

When I called to talk to the mortgage person I didn't really consider any sort of cash-out refinance, but now I am considering it and need to call him back. So below are the scenarios he gave me of just a normal refi. My questions are:

• We're eventually planning to finish our basement. Assuming this is going to be roughly $50-75K to do. Plan is to do it within the next 2-3 years. If we did a cash out refi and took out $50K or so, is there anything we need to worry about from a tax perspective or random refi rules that say we need to spend this money within any certain amount of time? We'd likely want to wait a little bit til mayyyyyybe materials prices come down and it's not so tough to find someone to do the work. But I want to refi NOW. 
• If we didn't do a cash out refi, and just did one of the scenarios listed below, we'd very likely end up needing to do a HELOC or home equity loan in the next couple years to pay for part of the basement renovation. Is there any benefit to doing a HELOC or loan over a cash out refi? As I understand it, both usually have a higher interest rate than the cash out refi would be, but I understand that a cash out refi would likely have a slightly higher rate than the 2 scenarios below. 
  
• Anything else I should be thinking about here? 

Refi scenario 1:
25 year term (we'd basically keep the same # of payments we currently have left since we've been in our house 5 years)
2.85%
Payments would decrease by about $190 per month
Over the remaining life of the loan, we'd save a little over $40K in interest

Refi scenario 2:
20 year term
2.75%
Payments would increase about $75
Over the remaining life of the loan we'd save, almost $80K


Sorry - that was a lot. Wanted to address details that would probably be asked in one post. 

[trissie18]

I would choose option 2 in a heartbeat if it meant paying off the house five years sooner for a very minimal monthly increase.

Benefit to doing the HELOC is it will cost you less $ in the end since you would presumable pay it off faster instead of over the life span of your mortgage. Even at a higher interest rate I would think you would come out very much ahead. Especially if you are going to be sitting on the money for a while.

[mlkgls]

Have you checked rates for a home equity loan? Rates were a bit higher than mortgage rates when I was rate shopping last year. Of the two scenarios you listed, I would choose #2, but I would research cash out refi and HE loan rates first. 

[donthasslethehoff]

Nov 10, 2021 18:19:36 GMT -5 mlkgls said:

Have you checked rates for a home equity loan? Rates were a bit higher than mortgage rates when I was rate shopping last year. Of the two scenarios you listed, I would choose #2, but I would research cash out refi and HE loan rates first. 

I have not looked at HEL rates yet, mainly because if we went with scenario 1 or 2, we'd do it now, and taking out an HEL wouldn't be for another 2 years or so, rates right now wouldn't really matter. 

And absolutely we'd go for option 2 of the two scenarios. So much savings with a pretty minimal monthly payment increase. 

[donthasslethehoff]

Nov 10, 2021 17:03:00 GMT -5 trissie18 said:

I would choose option 2 in a heartbeat if it meant paying off the house five years sooner for a very minimal monthly increase.

Benefit to doing the HELOC is it will cost you less $ in the end since you would presumable pay it off faster instead of over the life span of your mortgage. Even at a higher interest rate I would think you would come out very much ahead. Especially if you are going to be sitting on the money for a while.

That's a good point about having to pay back the HELOC quicker than I would if I were spreading $50K over a 20-25 yr loan w/ interest. Didn't think of it that way.

And yes, 100% will be doing scenario 2 if we just do a normal refi.