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Home Equity Line of Credit or Cash-Out Refinance?

July 18th, 2018

New Boise Branch

You’ve owned your home for a while, and have some equity you would like to use to finally update your kitchen, take a much-needed vacation, or consolidate your debt. You may have heard you can get a home equity line of credit (HELOC) or a “cash-out” refinance to take advantage of your home’s equity, but what are these and which is the right choice for you?

A HELOC is a revolving line of credit that draws on the equity in your house and uses your house as collateral. It’s like a credit card in that it has a variable interest rate and you can choose to draw as much or little as needed, up to the credit limit, for the duration of the draw period. Once the draw period is over, you have a set amount of time to repay the line of credit. A standard HELOC has a 10-year draw period and a 20-year repayment period, though this can vary. During the draw period, you only need to pay the interest on what you’ve borrowed. Once the repayment period begins, you make monthly payments to pay off what you drew.

A cash-out refinance replaces your existing mortgage with a new mortgage for up to a certain percent of the value of your house. For example, if you owe $120,000 on your house but it is currently worth $175,000, you may be able to get a cash-out refinance and a new mortgage for $140,000 and receive the difference between the new mortgage and what you previously owed, minus closing costs on the new loan in cash. In this example, you would get $20,000 minus closing costs. How much you can qualify to borrow is dependent on several factors, including credit score. Cash-out refinances can either be fixed or adjustable rate loans.

Is it better to choose a HELOC or a cash-out refinance? The answer to this question depends on your situation and financial goals. Broadly speaking, both loans give you access to cash for the reason of your choosing. However, HELOCs may be the better option if you are not sure how much cash you will need and want the option to borrow money only as you need it. This could be especially appealing if you want to borrow a small amount over a short period of time. A cash-out refinance may be the better option if you know how much you want to borrow and need cash up-front. With a cash-out refinance, you only make one monthly payment versus a HELOC, which is a separate payment from your mortgage. The increases to your monthly payments may also be different. Both products often offer lower interest rates than credit cards and provide flexible access to cash.

When choosing between a HELOC or a cash-out refinance, it’s important to also consider the fine details. Although cash-out refinances may have a lower interest rate, they often have more expensive up-front costs. In addition, you have to close on your house again with a cash-out refinance since you are taking out a new mortgage. This means you will pay up-front closing costs in addition to the monthly principal and interest payment. However, there are no additional fees beyond the closing costs. HELOCs assess fees throughout the duration of the line of credit, but, overall, those fees may end up being lower than closing costs for a cash-out refinance. Additionally, as you only have to pay interest during the draw period on a HELOC, monthly payments may be higher on a HELOC once your repayment period begins, depending on how much you draw.

To determine whether a HELOC or a cash-out refinance is the best choice for you, talk to your banker today!