Comparing Cash-Out Refinance Vs HELOC

Are you looking into refinancing your mortgage? 

Are you familiar with the details of a cash out refinance vs HELOC (home equity line of credit)? Are you concerned about making the right financial decision?

Not only do you have to decide if refinancing makes good financial sense, but you must also decide which approach is best. 

These are big decisions that can stress you out — but only if you don’t have the right information on your side.

My Perfect Mortgage will help you compare the finer details of a cash out refinance vs. HELOC. With this information, you can then decide which path is best for you.

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What is a Cash Out Refinance? What is a HELOC?

Making an informed and confident decision starts with understanding the basic definition of a cash out refinance and HELOC.

A cash out refinance replaces your original loan with a new loan that’s more than what you currently owe. The difference between the current loan amount and the new loan amount provides you with cash. That’s where the name “cash out refinance” comes from.

For example, if your current mortgage balance is $200,000 and your new loan is for $300,000, you’re left with $100,000 in cash to do what you please (more on this below).

A HELOC is different in the way that you receive all the cash at once. 

Instead of being left with one mortgage, you have two. With a home equity line of credit, you can borrow money as needed (with no obligation). As you borrow money, you’re required to make a minimum monthly payment during the repayment period. 

Pros and Cons of a Cash Out Refinance

There are both pros and cons of a cash out refinance. By comparing all of these, you can decide if this is a product you want to consider.

Pros

• Option to use the cash for anything you want, ranging from home repairs to debt consolidation and more.
• Interest rates are generally lower than other options, such as a HELOC or home equity loan.
• Cash out refinance loans can be customized by term and rate (fixed or variable).

Cons

• Since you’re adding money to your current loan, a cash out refinance will extend the time it takes to pay off your mortgage.
• Closing costs are likely when refinancing, with these potentially reaching as high as six percent of the total refinanced balance.
• Your new interest rate may be higher than your old rate.

Pros and Cons of a HELOC

A home equity line of credit is a unique product with various pros and cons. These include the following.

Pros

• You can borrow up to 85% of the value of your home, which is generally higher than with a cash out refinance.
• HELOC closing costs are generally less than those of a cash out refinance. 
• Since you’re not getting rid of your original loan, you get to keep your interest rate. 
• Once you pay off your HELOC, you’re left with your original loan payment. 

Cons

• HELOC interest rates are typically higher than if you refinance.
• HELOC terms are shorter than conventional mortgages. 
• Until you pay off the HELOC, you will make two monthly payments. 
• A variable interest rate can cause your payment to increase.

How are These Products Different? The Same?

Now that you understand the pros and cons of a cash out refinance vs HELOC, it’s time to turn your attention to the differences and similarities.

With both a cash out refinance and HELOC, you’re relying on the equity in your home. Without this, neither of these products is available to you.  Other similarities include:

• Varying terms. 
• How you can use the funds.
• Your home serves as the collateral.

On the flip side, there are various differences between the two. These include but are not limited to:

• Interest rates are almost always lower for cash-out refinances.
• A cash out refinance leaves you with one bigger loan, while a HELOC leaves you with two loans.
• Closing costs are lower for a HELOC. 

Frequently Asked Questions

It’s common to have questions as you compare a cash out refinance vs. HELOC. By answering these questions, you’ll better understand what each one offers and how to best proceed. 

Will you save money with a cash out refinance? 

You may save money with a cash out refinance if your new interest rate is lower than your current rate. For instance, if your current mortgage has a rate of 5% but you qualify for 3% with a cash out refinance, you’ll save money in interest over the long run. 

How can you use the cash-out money that you receive? 

There’s no limit as to how you can use the money from a cash out refinance. From home repairs to education expenses to traveling the world, the decision is yours.

What are the closing costs for a cash-out refinance? 

Cash out refinance closing costs are similar to those of buying a new home with a conventional mortgage. 

Is a home equity line of credit the same as a second mortgage? 

Yes, this is also known as a second mortgage, much in the same way as a home equity loan. 

What happens if you don’t repay a HELOC? 

Just the same as any mortgage loan, if you don’t repay a HELOC the lender has the legal right to repossess your property. 

Is a variable interest rate a good idea? 

Home equity lines of credit generally have a variable interest rate. So, the monthly payment you pay today is not likely to be the same in the future. It could be higher, it could be lower.  This is a risk you must be willing to take. 

Summary of cash out refinance vs HELOC

If you’re in search of cash and are willing to use the equity in your home to get it, a cash out refinance or HELOC could be the right answer.

At  My Perfect Mortgage, we can help you find the refinancing product that’s best for you, your home, your goals, and your financial circumstances. 

Get started with My Perfect Mortgage today!

Photo by Ketut Subiyanto from Pexels