HELOC vs Cash Out Mortgage Refinance

Key Takeaways

When considering borrowing against the equity in your home, you have three popular options: home equity loans, HELOCs, and cash-out refinancing. All three options involve using your home as collateral, which means that financing is less risky for the lender and may result in a lower interest rate for you. However, defaulting on payments could result in foreclosure on your home.

Here are some key takeaways to consider when deciding which option is best for you:

• With a cash-out refinance, you replace your existing mortgage with a new, larger mortgage and receive the difference in cash. Home equity loans and HELOCs, on the other hand, involve taking on an additional debt.
• The amount you can borrow with any of these options will depend on the amount of equity you have in your home.
• Home equity loans and HELOCs may be quicker to obtain than a cash-out refinance, but cash-out refinancing generally offers lower interest rates.
• The best option for you will depend on factors such as how much equity you have, how much money you need and when you need it, your intended loan purpose, your current mortgage's interest rate, and the nature of the repayment terms.
• Home equity loans and HELOCs may be a good option if you need a smaller amount of money and want more flexibility in how you use it. Cash-out refinancing may be a better option if you need a larger amount of money and want to take advantage of lower interest rates.
• It's important to carefully consider the pros and cons of each option and to shop around for the best rates and terms before making a decision.

Best HELOC for High LTV

Calculating how much equity you have in your home

Equity is the difference between your home's value and the amount you owe on your mortgage. It represents the portion of your home that you own outright. You can calculate your home equity as a dollar value or as a percentage of your home's worth.

To calculate your home equity dollar value, subtract the remaining balance of your mortgage and any other loans secured by your home from your home's value. For example, if your home is worth $300,000 and your outstanding mortgage balance is $200,000, your home equity is $100,000.

To calculate your percentage of home equity, divide your home equity dollar value by your home's value, then multiply by 100. In the above example, you would have 33.33% equity in your home:

$100,000 ÷ $300,000 x 100 = 33.33%

Knowing both your home equity dollar value and percentage is useful. Most lenders require that you have a certain percentage of equity in your home before you can start tapping it. They also require that you maintain a portion of it, typically at least 15% to 20%. That means that your loan's balance must be no more than 80% to 85% of the home's value. You can't deplete your entire equity stake.

The dollar value of your equity also impacts what you can borrow. Different lenders have different policies, but assuming a lender requires 20% equity, you could borrow up to $60,000 if you have $100,000 of equity in a $300,000 home. However, you would be able to borrow more if you had a higher equity stake. For example, if you had $200,000 of equity in a $500,000 home, you could borrow up to $200,000.

HELOC/Home Equity Loan vs Cash-Out Refinance

When considering borrowing against your home's equity, you have several options, including a home equity line of credit (HELOC), a home equity loan, and a cash-out refinance. Each option has its own features and benefits, and it is important to understand the differences to make an informed decision.

Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) is a type of revolving line of credit that allows you to borrow against the equity in your home. HELOCs typically have variable interest rates and a draw period during which you can access funds, followed by a repayment period. During the draw period, you can borrow up to your credit limit, and you only pay interest on the amount you borrow. HELOCs generally have lower closing costs than home equity loans, and you may be able to waive them if you keep the HELOC open for a certain period of time. HELOCs are best for borrowers who want access to funds for ongoing projects or in case of emergency.

Home Equity Loan

A home equity loan is a lump-sum payment that is borrowed against the equity in your home. Unlike a HELOC, a home equity loan has a fixed interest rate and a fixed repayment term. This means that you will have a predictable payment schedule and know exactly how much you will owe each month. Home equity loans generally have higher closing costs than HELOCs, and they are best for borrowers who want fixed payments and know how much they need.

Cash-Out Refinance

A cash-out refinance is a new mortgage that replaces your existing mortgage and allows you to borrow against the equity in your home. With a cash-out refinance, you can potentially lower your monthly mortgage payment, access funds, and know how much you need. Cash-out refinances have fixed or adjustable interest rates, and they generally require an equity requirement of 20%. The loan term for cash-out refinances can be up to 30 years, and they have principal and interest payments. Cash-out refinances have closing costs that are similar to those of home equity loans and HELOCs.

When deciding which option is right for you, consider your financial goals, your current mortgage, and your home equity. A financial advisor or mortgage professional can help you determine which option is best for your situation.

Final Word on Home Equity Loan/HELOC vs Cash-Out Refinance

Deciding between a home equity loan/HELOC and a cash-out refinance can be a challenging decision. Both options have their pros and cons, and the right choice for you depends on your specific financial situation and goals.

Here's a breakdown of the advantages and disadvantages of each option:

Home Equity Loan/HELOC

Pros

• Provides all funds upfront
• Fixed interest rate
• Good option if you know how much you need to borrow
• HELOCs allow you to pull funds when you need them and pay them back after the draw period ends
• HELOCs can be a good option if you need funds over a long period or don't have a precise sum in mind

Cons

• Higher interest rates than cash-out refinancing
• HELOCs have variable interest rates
• If you default on the loan, the lender can foreclose on your home

Cash-Out Refinance

Pros

• Lower interest rates than home equity loans and HELOCs
• Replaces your current mortgage, making it easier to borrow a larger sum
• Offers financing at a substantially lower interest rate than home equity loans and HELOCs

Cons

• More elaborate and expensive process than home equity loans and HELOCs
• Might not be a good option if you don't plan on staying in your home for a long time
• If you default on the loan, the lender can foreclose on your home

Regardless of which option you choose, it's essential to keep in mind that taking out any kind of loan against your home is a significant decision. Make sure to carefully consider your options and choose the one that best fits your needs.