Home equity or refinance: Which is better for you?

By Michael D. Larson

Looking to refinance your first mortgage and take cash out at closing? There may be a better deal for you.

When the prime rate is below the average rate charged on 30-year fixed mortgages, consumers looking to tap their home equity may find it cheaper for them to get equity loans or lines of credit. Besides costing thousands of dollars less in closing costs, the rates on these loans may be lower than first mortgages.

Before rushing out to a lender, though, consumers should take stock of why they're borrowing and which loan makes the most sense for them. While home equity loans and lines of credit are currently attractive, they still aren't always the best option.

"It's good for someone who has to make a purchase and they know they're going to pay it off in a few years or they may want to move out in a couple of years," said Jim Cosman, managing director for consumer finance and executive vice president at Philadelphia-based Sovereign Bancorp Inc.

"But once you get a bigger dollar amount, the line starts to cross," he added. "If I need a longer time to pay this off in order to keep my payments reasonable, if I can't afford a five-year or 10-year repayment schedule, I may need to go with a mortgage."