Home Equity Line of Credit (HELOC) are open-ended line of credit based on a homeowner's equity. Most HELOC loan amounts are limited to 75 or 80 per cent of the appraised value. Home equity loans are paid off over a shorter period than mortgages, which increases the monthly mortgage payments. Since you can make additional principal payments on the refinancing to bring down the loan balance, the shorter term of the home equity loan isn't an advantage.

A HELOC is revolving credit, so you can pay off the home repairs and borrow against the line again without having to take out another loan. Since the interest on personal loans isn't tax deductible and the interest expense on a mortgage or home equity loan typically is tax deductible you can save money by using the revolving credit line.

A HELOC is a variable-rate loan, and minimum monthly payments won't amortize the loan. You have to have the financial discipline to make monthly payments that will pay off the loan over its term. Otherwise, you end up with a rather nasty balloon payment due at the end of the loan. The payment presented for the HELOC alternative in the table is based on the rather unrealistic assumption that the interest rate never changes, but it will pay off the loan over its 15-year life.

Finally, if you can use the interest-expense deduction on the home equity loans, you should be able to use the deduction on the cash-out refinancing. IRS Publication 936 has the complete information on home mortgage interest deductions. Borrowing money you don't need is expensive. But, if you can invest the additional cash at a higher after-tax rate of return than the after-tax cost of debt, it can be to your advantage to borrow the money and invest it until you need it. To find out the after-tax cost of debt, multiply your loan rate by the quantity one minus your marginal federal tax rate minus your state tax rate. Taking this approach to invest in the stock market isn't for the faint of heart, especially if the value of your stocks heads south. Paying back money that you lost in the market is never fun. The best option is to roll the refinancing up into a new first mortgage, preferably a 15-year fixed rate mortgage. You'll have higher closing costs on a first mortgage than you would on a home equity loan, but reducing your interest expense in repaying the old HELOC will make it worthwhile and you'll have financed your cushion at a lower rate as well.

To refinance, you need to lower your monthly payments by enough to cover your closing costs on the loan before you sell the house. A no-cost refinancing is tempting, but it really isn't free. You either pay a higher interest rate than you would otherwise or wind up borrowing the closing costs. Don't just look at the lower payment and commit to the refinancing. Understand how the lender is covering the closing costs.