As a homeowner, you might find yourself in a position where tapping into your home’s equity becomes an appealing option.
Whether you’re considering a major renovation, consolidating debt, or funding another large expense, two popular options can help you access that equity: Cash Out Refinance & a Home Equity Line of Credit (HELOC). Both have their advantages, but choosing the right one depends on your financial goals & situation.
Let’s break down each option to help you decide which might be the best fit for you.
Cash-Out Refinancing
A cash-out refinance involves replacing your existing mortgage with a new one that’s larger than the amount you currently owe. The difference between your new mortgage amount & your old mortgage balance is given to you in cash, which you can use for any purpose.
Advantages:
- Potential for Lower Interest Rates: If interest rates have dropped since you took out your original mortgage, you could secure a lower rate on your new loan, saving money over time. On the flip side, if rates are higher, you’ll be locking in your entire mortgage balance at the current rates.
- Lump Sum Payout: You receive a lump sum of cash, which can be useful for large, one-time expenses like home renovations, paying off high interest debt, or making a significant purchase.
- Longer Repayment Term: Because you’re refinancing, you may be able to extend your repayment term, reducing your monthly mortgage payments.
Considerations:
- Resetting Your Mortgage Term: By refinancing, you’re essentially starting over with your mortgage, which means extending the time it will take to pay off your home.
- Closing Costs: Like your original mortgage, a cash out refinance comes with closing costs that can be several thousand dollars, so it’s important to factor that into your decision.
Home Equity Line of Credit (HELOC)
A HELOC is a revolving line of credit that’s secured by the equity in your home. Instead of receiving a lump sum, you can borrow money as you need it, up to a certain limit, during a draw period (usually 5 to 10 years). During this time, you typically make interest only payments on the amount you’ve borrowed. After the draw period ends, you’ll enter the repayment period, where you start paying back both the principal & interest.
Advantages:
- Flexibility: With a HELOC, you can borrow only what you need, when you need it, making it a good option for ongoing or unpredictable expenses like home repairs, medical bills, or education costs.
- Interest Only Payments: During the draw period, you’ll only pay interest on the amount you borrow, which can keep your monthly payments low.
Considerations:
- Variable Interest Rates: Unlike a cash out refinance, which typically offers a fixed rate, HELOCs usually have variable interest rates. This means your payments could increase over time if interest rates rise.
- Risk of Overspending: Because a HELOC works like a credit card, it can be tempting to borrow more than you need, leading to debt that may be difficult to repay.
Which Option is Right for You?
Deciding between a cash out refinance & a HELOC depends on your specific financial needs & goals. If you need a large sum of money for a major expense & prefer the stability of a fixed interest rate, a cash out refinance might be the better choice. On the other hand, if you want flexibility & only need to borrow smaller amounts over time, a HELOC could be a more suitable option.
Consult with a Local Lender
Still unsure which option is right for you? The best way to make an informed decision is to speak with a qualified lender who can review your financial situation & help you weigh the pros & cons of each option. I can connect you with a great local lender who will work with you to find the best solution for your needs.
Tapping into your home’s equity is a big decision, so take the time to explore your options & choose the one that best aligns with your long term financial goals. Whether you’re leaning towards a cash out refinance or a HELOC, understanding the differences can help you make the most of your home’s equity.
