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Cash-Out Refinance Vs. HELOC

Have you ever looked around your home and thought to yourself, “What has this house done for me lately?” Of course, it’s covering the basics: offering you and your loved ones shelter, kept your art up on the walls, and has been the setting of some amazing memories.

But, has your home provided you with equity?

Your home equity is an asset you can use to access more money through deals like a home equity line of credit (HELOC), or a cash-out refinance.

A cash-out refinance replaces your previous mortgage. When you apply for a refi, you apply for a completely new loan. The “cash-out” part means you’ll have to borrow a larger amount than you currently owe. So, if you owe $200,000 on your current mortgage, you could borrow $250,000. Then you receive $50,000 as a liquid cash loan that you can use flexibly.

A HELOC works like a credit card, where the limit is tied to the equity of your home. You can use your credit as you need it. Once you repay what you’ve spent, you may continue to access that line of credit. However, unlike a credit card, your line of credit is only accessible for a period of time (typically 10 years).

When you tap into equity, it’s usually for home-related expenses like repairs or renovations. However, with a HELOC or cash-out refi, you can use your cash as you’d like, giving you flexibility. With extra cash on hand, you can cover large expenses that come up in your life. This can fund college tuition, consolidate debt, or contribute toward any other large expense.

If access to more money sounds good to you, keep reading and you can learn more about the differences between a cash-out refinance vs. HELOC.


Not So Fast, Check Your Equity First!

Before we go down the rabbit hole of comparing a cash-out refinance and a HELOC, you should understand if you’re eligible for either. That eligibility is based on the amount of equity you have in your home.

If you owe less than the current value of your home, good news: you’re eligible. But if you owe more than your home is worth, you’re not ready for a HELOC or cash-out refinance yet. You’ll have to pay off more of your mortgage before you can apply.

To calculate your home equity, you need to know the following:

  • The value of your home
  • How much you still owe on your mortgage


The Pros and Cons: Cash-Out Refinance vs. HELOC

Now that you know if you could and should apply for either a cash-out refi or a HELOC, let’s get into the finer details of both loans.

Benefits of a cash-out refinance:

  • Refinancing can be a great option if your credit score or mortgage rates have improved since you took out your first mortgage.
  • The loan you receive as part of your cash-out is flexible. You choose from different types of loans with competitive terms and rates.
  • You’ll still only have one mortgage payment with predictable payment amounts each month.

A few things to consider before applying for a cash-out refinance:

  • Refis usually include 2-6% in closing fees, which can be pretty hefty.
  • You could end up with a new mortgage and less favorable terms than your original one.
  • You could end up with a larger monthly mortgage payment and be in mortgage debt for a longer amount of time.

Now, if you’ve ever heard the term “taking out a second mortgage,” someone was probably referring to either a home equity loan or a HELOC. That’s because it’s a loan repayment you make in addition to your existing mortgage payment.

Benefits of a HELOC:

  • If you already have a great mortgage rate, you can keep it by tapping into a HELOC.
  • Just like a credit card, you only have to repay—and pay interest on—the amount of money you’ve borrowed.
  • HELOCs may have lower closing costs than a cash-out refinance.

A few things to consider before applying for a HELOC:

  • Since you’re taking out a loan in addition to your mortgage, you’ll have two monthly payments. You’ll need to budget accordingly.
  • HELOC rates are typically variable, so estimating your monthly payment can be difficult since it may fluctuate from month to month.
  • Unless you’re using a HELOC to cover home expenses, the interest you pay is not tax-deductible.


Questions To Consider When Deciding Cash-Out Refinance vs. HELOC

Everyone’s situation is different. Our UMe team members can guide you through your decision, but you can also consider a few basic questions regarding your own needs.


How much money do you need?

Since you can receive 80-85% of your home’s value through a cash-out refi or HELOC, it makes more sense to tap into either option to cover larger expenses. You can justify the closing costs of each by borrowing a larger amount of money.


How do you plan to use that money?

HELOCs are great for borrowing a larger amount of money over time, especially for home repairs or a renovation. You can access funds indefinitely during your draw period, so you’ll gain the flexibility of being able to withdraw for about 10 years.

But, if your plans for using the money are vague, both a cash-out refi and HELOC can be big risks. Defaulting on repayment for either can result in foreclosure on your home.


How long do you plan to stay in your home?

Neither a HELOC nor a cash-out refi is a great option if you won’t be in your home for long. HELOCs typically have a draw period of 10 years. But if you sell your home before then, you’ll have to pay back whatever you borrowed immediately.

And since refinancing is essentially replacing your old mortgage with a new one, the same rule of thumb still applies: you should plan to stay in your home for the next five years to make the closing costs worth it.


Ready To Tap Into The Power Of Your Home’s Equity?

Your home can do more for you than keep the rain out.

Whether you’re looking to refinance or access a HELOC, we can help! And what better time than now—we’re offering a very low 5.99% 12-month intro rate for HELOCs. You can borrow up to $400,000, with no application or closing fees.

Because the relationship between U and Me is our first priority, UMe is always looking out for our members’ best interests, finding the right solution in each circumstance. As a financial institution, we love numbers, but we’ll never treat you like one. We’re here to take care of U because when U prosper, we all prosper (we’re neighbors, after all).

Click the button below to learn more about how our HELOC options can help you cover life’s large expenses without breaking the bank.


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