Cash-Out Refinance or HELOC: Comparing Home Equity Options
Learn more about the two leading options for equity-based borrowing: cash-out refinance and home equity line of credit (HELOC). Understand differences in fees, interest, loan terms, and when to use each option. Get the facts and make an informed decision.
Comparing Home Equity Options: Cash-Out Refinance vs. HELOC
When it comes to leveraging your home equity, the two main options are a cash-out refinance or Home Equity Line of Credit (HELOC). Both of these loan types are popular and have their own merits, but it's important to understand the differences between the two before deciding which one is best for you.
Cash-Out Refinance
A cash-out refinance works by taking out a new loan with a higher balance than your current mortgage loan to pay off the existing mortgage and give you the difference in cash. This type of loan can be used for a variety of purposes, such as funding home improvements, consolidating debt, or even paying for tuition fees. It typically comes with a fixed interest rate and terms that range from 10 to 30 years.
Home Equity Line of Credit (HELOC)
A Home Equity Line of Credit operates similarly to a credit card in that you can borrow up to a certain amount and only pay interest on the amount you've actually used. This type of loan gives you the flexibility to use only what you need, as you need it. However, it typically has a variable interest rate that can go up or down more frequently than with a fixed-rate loan. You are also usually limited to a 10-year repayment period.
Comparing the Two Options
When deciding which one to choose, there are a few key differences to consider. The first is the amount of money that is available to borrow. With a cash-out refinance, the amount of money you can borrow is determined by the value of your home, whereas with a HELOC, the amount you can borrow is determined by your creditworthiness.
Another key difference is the interest rate, as described above. Generally, cash-out refinances tend to have lower interest rates than and HELOC, so if you're looking for a long-term loan with a lower rate, a cash-out refinance may be the better option. On the other hand, if you're looking for shorter-term financing with more flexibility, a HELOC may be the better choice.
Finally, cash-out refinances tend to have longer repayment terms than HELOCs, so it is important to consider the amount of time you'll have to pay off the loan when deciding which to choose. With a cash-out refinance, you'll get the benefit of reducing your monthly payments with a longer repayment term, whereas with a HELOC, you can pay off the loan faster, but have higher monthly payments.
The Bottom Line
When it comes to considering your home equity options, a cash-out refinance and HELOC are both good options with their own merits. Consider the amount of money you need, the length of the loan, and interest rate when deciding which loan best suits your needs.