HELOC vs. Cash-Out Refinance

If you’re interested in borrowing against your home’s available equity, you have choices. Some options are to refinance and get cash out, or to take out a home equity line of credit (HELOC).

Here are some of the key differences between a cash-out refinance and a home equity line of credit:

A cash-out refinance  replaces your existing mortgage with a new home loan for more than you owe on your house. You must have sufficient equity built up in your house to use a cash-out refinance. The difference goes to you in cash, which can be spent on home improvements, debt consolidation, or other financial needs.

With a  Home Equity Line of Credit (HELOC), you are borrowing against the money already invested in your home. Much like a credit card, you have a  certain amount of money available to borrow and then pay back. You will only pay interest on the amount you borrow.

Interest Rates

Cash-out refinance is available through either a fixed-rate mortgage or an adjustable-rate mortgage. Your lender can provide information about fixed-rate and adjustable-rate mortgage options so you can decide which one best fits your situation.

HELOCs often begin with a lower interest rate than cash-out refinancing loans, but the rate is adjustable. Home equity line of credit (HELOC) has an interest rate that’s variable and changes in conjunction with an index, typically the U.S. Prime Rate as published in The Wall Street Journal.

Closing Costs

Cash-out refinance incurs closing costs similar to your original mortgage. On the other hand, home equity line of credit (HELOC) usually has no (or relatively small) closing costs.

What's Next?

You may be wondering what you can do with the money pulled out. This money should be used for purposes that really add value. There are many options to consider!

1. Change the cabinet colors in your kitchen.

2. Power wash your house.

3. Upgrade your landscaping.

4. Install some outdoor lighting.

5. Build a patio.

Smart homeowners tend to see their home not only as a place to do life, but also as one of the best ways to build wealth through home equity. So, be sure to put that extra money to good use and make the most of your assets.

Bottom Line

If you think that borrowing against your available home equity could be a good financial option for you, talk with your lender about cash-out refinancing and home equity lines of credit. Based on your personal situation and financial needs, your lender can provide the information you need to help you choose the best option for your specific financial situation.