Accessing Home Equity: Cash-Out Refinance¹ vs. HELOC²
If you’re a homeowner needing funds for a major expense, like a home renovation or debt consolidation, tapping into your home equity might be a smart move. But with various loan options available, it can be tough to decide the best route. In this article, we compare two popular choices: cash-out refinance and home equity line of credit (HELOC), helping you make an informed decision.
Understanding Home Equity
Before we dive in, it’s important to understand home equity. Your home equity is the difference between your home’s value and what you owe on your mortgage. For example, if your home is valued at $400,000 and you owe $200,000, your equity is $200,000.
What Is a Cash-Out Refinance?¹
A cash-out refinance replaces your current mortgage with a new one for a higher loan amount, allowing you to access part of your home’s equity. The additional funds can be used for any purpose, such as renovations or debt consolidation.
Approval Requirements
- Home Equity: You need enough equity in your home.
- Credit Score: A score of 620 or higher is typically required.
- Debt-to-Income (DTI) Ratio: For conventional loans, a DTI under 50% is needed.
What Is a HELOC?
A HELOC is a revolving credit line, similar to a credit card, that allows you to borrow against your home’s equity. It typically comes with a set credit limit and a draw period, during which you can borrow funds.
Approval Requirements
- Home Equity: Sufficient home equity is required.
- Credit Score: A minimum score of 680, sometimes 720 or higher, is needed.
- Debt-to-Income (DTI) Ratio: A DTI of 43% or lower is common.
Comparing Cash-Out Refinance and HELOC
- Loan Terms: A refinance extends your mortgage term, while HELOCs have shorter terms (draw periods of 10-15 years, followed by repayment).
- Interest Rates: Refinances offer fixed or adjustable rates, while HELOCs usually have variable rates.
- Monthly Payments: Refinance payments are fixed, whereas HELOCs require interest-only payments during the draw period.
Key Differences
- Cash-Out Refinance: Often comes with lower rates and less strict approval requirements, but adds to your mortgage.
- HELOC: Works as a second mortgage with flexible borrowing but has variable interest rates, which can lead to higher costs.
Factors to Consider
- Loan Terms: Do you prefer extending your mortgage or shorter repayment periods?
- Payment Options: Would you rather receive a lump sum (refinance) or have access to funds over time (HELOC)?
- Interest Rates: Would you benefit from fixed rates or are you comfortable with variable rates?
- Closing Costs: Refinances typically have closing costs, while HELOCs may not.
- Tax Implications: Cash is tax-deductible only when used for home improvements.
The Bottom Line
Both cash-out refinances and HELOCs allow you to tap into your home equity, but they vary in how you access funds, interest rates, and repayment terms. Weigh the pros and cons carefully to choose the best fit for your financial situation.
Need Help? Contact Us!
At HHL Group, we’re here to guide you through the process of accessing your home equity. Our team can help you explore the best mortgage options for your needs. Contact us today to get started!
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By refinancing, you may pay more in costs and interest over the extended term. It is important to weigh the costs associated with refinancing to ensure refinancing is right for you.
1 Using funds from a Cash-out Refinance to consolidate debt may result in the debt taking longer to pay off as it will be combined with borrower’s mortgage principle amount and will be paid off over the full loan term. Contact HHL Group or more information.
2 HHL Group home equity line of credit (HELOC) is an open-end product where the full loan amount (minus the origination fee) will be 100% drawn at the time of origination. The initial amount funded at origination will be based on a fixed rate; however, this product contains an additional draw feature. As the borrower repays the balance on the line, the borrower may make additional draws during the draw period. If the borrower elects to make an additional draw, the interest rate for that draw will be set as of the date of the draw and will be based on an Index, which is the Prime Rate published in the Wall Street Journal for the calendar month preceding the date of the additional draw, plus a fixed margin. Accordingly, the fixed rate for any additional draw may be higher than the fixed rate for the initial draw. This product is currently not offered in the states of New York, Kentucky, West Virginia, Delaware and Maryland. The HELOC requires you to pledge your home as collateral, and you could lose your home if you fail to repay. Borrowers must meet minimum lender requirements in order to be eligible for financing. Available for primary, second homes and investment properties only. Dependent on minimum credit score and debt-to-income requirements. Occupancy status, lien position and credit score are all factors to determine your rate and max available loan amount. Not all applicants will be approved. Applicants subject to credit and underwriting approval. Contact HHL Group for more information and to discuss your individual circumstances. Restrictions Apply.
