Need cash? Mortgage options that can help

Is your kid's college tuition due, or have you recently been hit with unexpected medical bills? Or maybe you're retired and just need a few more dollars each month to cover your household expenses.

Whatever your situation is, if you have some equity in your home, there are some strategies you can use to get that cash you need now. Want to know more? Keep reading to check out these three ways to take cash out of your home's mortgage - and the pros and cons of each option.

#1: A Cash-Out Refinance

If you're in need of cash for an upcoming big expense, a cash-out refinance is one option you should consider.

A cash-out is when you refinance your mortgage for more than what you currently owe, says Bill Rayman, mortgage banker and senior vice president of Mortgage Capital Partners. That difference between what you owe on your mortgage and the actual amount you refinanced for is liquidated (turned into cash), and can be used at the borrower's discretion.

The Pros

One pro of a cash-out refinance is the ability to potentially lock in today's historically low rate for the life of the loan (by refinancing to a fixed-rate mortgage), while taking out the cash you need at your dispense.

Rayman adds that cash-out refinances are also effective if you have a promising investment opportunity. In fact, he says borrowing money for investment opportunities is the single biggest reason people are doing cash-outs.

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"If you can borrow money at 3.5 percent and you have an investment opportunity that's going to pay you 4, 5, 6, 7 percent or higher, that becomes a really good reason to do a cash-out refinance," asserts Rayman.

The Cons

Although a cash-out refinance can be a great thing, it can also be expensive. According to the Federal Reserve Board (FRB), closing costs on a refinance can run you anywhere from 3 to 6 percent of the total amount of your mortgage. So on a $400,000 refinance, closing costs could be anywhere from $12,000 to $24,000.

Another con is that you'll own less of your home since you're digging into the equity you have for the cash-out refinance. The problem with this, according to the FRB, is that when it comes time to sell your home, you'll see less in your pocket after the sale.

One more con? The length of time it takes to actually get the cash: Rayman says it takes him about 40 days to do a cash-out refinance for clients.

#2: Home Equity Line of Credit

Rayman says that if you don't want to go through refinancing your mortgage, a good alternative would be to set up a home equity line of credit (HELOC).  A HELOC is when you're approved to borrow up to a certain amount of money that is determined based on the amount of equity you have in your home, says Rayman.

According to the FRB, "many lenders set the credit limit on a home equity line by taking a percentage (say 75 percent) of the home's appraised value and subtracting from that the balance owed on the existing mortgage."

Here's an example by the FRB:

The Pros

Instead of going through the refinancing process to get cash out, a HELOC allows you to take cash out of the equity you have in the home. And while a HELOC also comes with closing costs - just like a cash-out refinance does - you end up paying a lot less because you'll be borrowing less.

For example, let's say your home is worth $500,000, you still owe $120,000 on your mortgage, and you need to take out $100,000 in cash. If you opted for a cash-out refinance, you would refinance $220,000 (the $120,000 you owe plus the $100,000 in cash). If closing costs are at 4 percent, they would cost you $8,800 for the loan.

But, if you opted for the HELOC with the same numbers, you would only pay closing costs on what you take out in cash, which is $100,000. At 4 percent closing costs, you'll end up paying only $4,000.

Another plus? Rayman says that setting up a home equity line is a fairly quick process, and it only takes him three weeks to set them up for clients.

The Cons

Before you get on the phone with your lender, consider these cons to a HELOC as well. First, according the FRB, HELOCs typically operate on variable interest rates, meaning that you might never know exactly what your payment will be every month.

Second, some HELOCs come with annual membership or maintenance fees, says the FRB. Others may also charge you for every purchase you make using the cash you took out of your home's equity. So the fees could also add up over time.

And probably the most important con is that when you take out a HELOC, you're actually putting your home up as collateral. So if you can't pay back your loan, you risk losing your home.

#3: A Reverse Mortgage

If you're over the age of 62 and looking for cash to complement your living expenses, a reverse mortgage might just be the solution for you.

A reverse mortgage, according to the FRB, is available to seniors who own all or almost all of the equity in their home. And it basically is just what the name says - a mortgage in reverse. This means that instead of making payments to the lender, the borrower receives payments from the lender that come from the equity they have built up in their homes.

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The Pros

After retirement, senior citizens are often on a tight, fixed income. With a reverse mortgage, the money they receive can assist with living expenses.

So how does the lender make their money back from lending you this money? When your home is sold, the lender keeps the money that is equal to the current value of the house. But, if the home sells for less than you received from the reverse mortgage, the difference is absorbed by the lender as part of the deal of you paying them interest and other fees, according to the FRB.

And here's the big pro: If your home actually sells for more, the difference goes back to you or your heir(s).

The Cons

Perhaps the biggest downside to a reverse mortgage is that over time, you lose equity in your home. And that means that you'll own less and less of it - and you or your heir(s) will see less money when it's sold.

Plus, reverse mortgages generally come with higher fees and closing costs than a traditional loan, according to the FRB. This is mostly due to the risk the lender takes if your home sells for less than the amount you received through the reverse mortgage.

These fees include a reverse mortgage insurance premium and a servicing fee in addition to interest that you must pay every month, says the FRB.