Cash Out Refinancing vs. HELOC

If you own your home, you have likely accrued some equity. Wouldn’t it be nice to be able to use some of that equity on other needs? Fortunately, tools exist to help you unlock the equity you’ve built up in your home.

There are two common ways to use the value of your home to take out additional money. The first is a home-equity line of credit (HELOC). The second is a cash out refinancing option. We’ll walk you through a cash out refinance vs. HELOC comparison and help you decide what’s best for you.

HELOC

A home equity line of credit (HELOC) is a line of credit that is borrowed against the equity in your home. They are a similar concept to a credit card, where when you repay the money you have borrowed, the credit is replenished. HELOCs typically have adjustable monthly interest rates. With a HELOC, you can usually borrow up to 75-90% of your available equity.

Cash Out Refinancing

Cash-out refinancing is when you refinance your home (replace your mortgage) with a new loan that is higher than the amount you owe on the home. This gives you access to that surplus money, which you can withdraw in cash.

In most cases, lenders want you to maintain at least 20% equity in your house, meaning that if you owe $100,000 on a $200,000 house, you could potentially refinance for $160,000 and withdraw up to $60,000 in cash (maintaining $40,000 in equity).

Weighing the Options: Cash Out Refinance vs. HELOC

Here are some general guidelines to help you decide between a HELOC and a cash out refinance.

Consider your current mortgage

If you have a great mortgage rate as it stands, it may be unwise to refinance your mortgage. Especially if interest rates are high when you are shopping, or if your credit score has dropped dramatically, you might end up with a worse mortgage than you started with. In this case, a HELOC might be a better option for you.

If, however, your current mortgage rate is high compared to the rates on the market at the moment, now may be a good time to think about a cash out refinance.

It’s also important to realize that if you are considering a cash out refinance, all the normal factors that come with refinancing your home apply. Refinancing costs money. You want to make sure that the fees you are paying to refinance your home are made up for by the benefits – like lower interest rates.

Consider your new monthly payments

If keeping track of multiple monthly payments does not seem ideal to you, a cash out refinance might be a good idea. This consolidates all the debt into your mortgage, meaning you only pay back that one amount per month, as opposed to separate HELOC and mortgage payments.

Consider how much money you need

If you are not sure how much money you need, a HELOC can give you that flexibility.

As discussed, HELOC functions similarly to a credit card, so you can borrow the money you need as you need it. This helps with unpredictable projects, like home remodeling. With a HELOC, you can withdraw as you need it over 10 years. After this period, you will have a 20-year repayment period where repayment continues, but you can no longer borrow more money.

Consider the closing costs

Refinancing a mortgage comes with fees that are worth it if you can recoup them over time. This may mean that you don’t want to refinance your home in the last few years of your mortgage. If you do this, you may not have time to make back the money spent on refinancing. On the other hand, HELOCs usually have very low to no closing costs.

Consider the interest rates

HELOCs may start with lower interest rates, but the interest rate is variable over time. This means that you may end up paying much more for interest than originally anticipated. On the other hand, cash-out refinancing comes with a fixed interest rate, so while the interest rate may be higher than a HELOC, you know what to expect.

Consider what you need the money for

One benefit of both HELOCs and cash-out refinancing options is that the interest is typically tax-deductible if you use the loan to buy, build, or substantially improve your home. In this case, either of these choices may be a good option over, say, a personal loan.

Another option we haven’t discussed here is a home equity loan. We’ve compiled another guide to help walk you through the differences between a Home Equity Loan and a HELOC, and help you decide on the best option.

If you’re interested in seeing the comparison, click the link below.