Smart Money Podcast: Filing Taxes Early and Tapping Home Equity

Liz Weston, Sean PylesFeb 22, 2021

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Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.

This week’s episode starts with a discussion of why you probably want to file your taxes sooner rather than later.

Then, we pivot to this week’s question from B, who writes, “I have a fixed 30-year mortgage at 3%. With 22 years left to go, I can save $300 to $400 a month with a refi at 2.75%. That's a 30-year fixed with a local credit union and no points. We plan on staying in the home for at least the next seven years and may want to use the extra cash from the refi to put down on a second home, or does it make more sense to use our HELOC as a tool for down payment?”

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Tapping your — through a loan, line of credit or cash-out refinance — involves some risk. You could lose your home to foreclosure if you can’t make the payments, which is why financial planners generally discourage tapping your home equity for uses that don’t build wealth, such as vacations, cars or paying off credit card debt. But using some equity to fund the purchase of another home can make sense, since that home can grow in value.

The best way to tap your home equity depends on a number of factors, including how long you’ll need to pay back the money and the interest rates on each option.

For example, B could opt for a that replaces their current mortgage with a larger one, giving B the difference in cash to use as a down payment. Primary mortgages tend to have the lowest interest rates, but B is committing to a long payback period and easily could pay more in interest overall compared with the other options.

Alternately, B could take out a second mortgage in the form of a or . Home equity loans typically have higher interest rates than primary mortgages, but also come with fixed rates and relatively long terms, usually 15 to 20 years.

By contrast, a home equity line of credit is more like a credit card. Rates are typically variable, and paying down the balance generally frees up credit that B could reuse. Many HELOCs also offer the option to fix the rate on a portion of the balance for a year or more. HELOCs usually have a 10-year draw period with interest-only payments. After that, payments get significantly higher as you pay principal and interest.

HELOCs are often a good choice for short-term borrowing, such as for home repairs. But a cash-out refinance would give B the chance to lower the rate on their primary mortgage while providing relatively cheap cash for the down payment money. A home equity loan might be a good compromise if the homeowner didn’t want to refinance their primary mortgage but wanted a fixed rate and more time to pay back the loan.

Understand the risks. You could lose your home to foreclosure if you can’t pay back a home equity loan or line of credit.

Weigh your options. HELOCs are good for short-term borrowing. A cash-out refinance or home equity loan might be better for longer-term use.

Shop around. Compare different offers and apply to at least two lenders to get the best deal.

Have a money question? Text or call us at 901-730-6373. Or you can email us at . To hear previous episodes, return to the

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