Home Equity Loans, HELOCs or Cash-out Refinances: Which is Right for You?

October 31, 2019

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Home Equity Loans, HELOCs or Cash-out Refinances

Home prices have been steadily rising for the last few years, and as a result, homeowners now have more equity than ever. In fact, according to property data firm Black Knight, total tappable home equity hit a record-high last quarter, clocking in at more than $6 trillion dollars.

If you’re one of the many homeowners who have seen their equity stake rise in recent years, then you’re in luck. For one, it likely means more in profits when you’re ready to sell.

But more than that, it also means a home equity loan, HELOC, or cash-out refinance could be a good option. All three allow you to leverage your home equity to pay for home improvements, cover medical bills or college tuition, or even consolidate higher-interest debts like credit cards and car loans.

Curious if one of these equity options is a good move for you? Let’s look at all three in more depth.

Home Equity Loans

A home equity loan is essentially a second mortgage. You’ll receive a lump sum based on your equity, and then you’ll pay the balance down (plus interest) month over month.

Pros of home equity loans:

You get an up-front, lump-sum payment.

You’ll enjoy a fixed interest rate and consistent monthly payments.

You can deduct interest paid on the loan, as long as you use the funds to improve your property.

Closing costs may be lower than a refinance.

Cons of home equity loans:

They add a second mortgage payment.

They use your home as collateral, putting it at risk if you fall behind on payments.

They come with higher interest rates than refinances.

HELOCs

HELOCs, or home equity lines of credit, are similar to home equity loans in that they allow you to turn your equity into cash; however, there are a few key differences. For one, a HELOC doesn’t offer a lump-sum payment. Instead, it acts like a credit card. You’ll have a total line of credit you can pull from as needed — taking as much or as little as you like. You also won’t pay interest on the entire line, as you do on a home equity loan balance. Instead, you’ll pay for only the money you actually withdraw and use.

Pros of HELOCs:

You can pull funds as needed over time (usually 10 years).

You’ll only pay interest on what you need.

It may come with fewer interest and closing costs than other options.

You can deduct interest paid on the line of credit, as long as you use the funds to improve your property.

Cons of HELOCs:

They usually come with variable interest rates, meaning your payments could go up over time.

There may be ongoing maintenance fees to keep your line of credit open.

You may owe a significant amount of money once your draw period closes.

They use your home as collateral, putting it at risk if you fall behind on payments.

Cash-out Refinances

A cash-out refinance is a little different than HELOCs and home equity loans. Though your total equity does play a role, you’re not technically tapping it. Instead, you’re using a new mortgage loan to pay off your old one. The difference between the two loan balances is what you’ll “cash out” from.

Here’s how it works: Let’s say you have $125,000 left on your current mortgage. If you refinance into a $175,000 loan, you could pay off the first loan ($125,000), and leave $50,000 for home improvements or other expenses you might have coming up.

With a cash-out refinance, you’ll replace your current mortgage payment with a new one. Depending on what your new interest rate is, as well as your balance, the payment could be higher or lower than your current one.

Pros of cash-out refinances:

It doesn’t add a second monthly payment.

Interest rates are lower than on HELOCs and home equity loans.

You’ll get a lump-sum payment to use how you wish.

You may be able to lower your interest rate in the process.

You can deduct the interest paid on the loan.

Cons of cash-out refinances:

They may have higher closing costs than other options.

You may need private mortgage insurance if you take out too large a loan.

You could extend your payment term significantly.

Deciding Which is Best

All three options can be a good way to access cash when you need it, but the right choice really depends on your financial situation, your current loan, and your goals for the move.

You’ll want to think about:

Your current loan’s interest rate. If you have a low interest rate on your current loan, refinancing into a new, higher-rate mortgage isn’t a great choice. You might want to consider a HELOC or home equity loan to protect that low rate.

Your budget. Can you afford to take on a second monthly payment? If so, a HELOC or home equity loan can work. If not, refinancing your existing mortgage is probably the better option.

Your goals. Do you know exactly how much you need and what you’ll use it for? Or do you need cash for ongoing projects and expenses over the next few years? HELOCs give you a line of credit to draw from over an extended period of time, while home equity loans and refinances offer a one-time, lump-sum payment.

Are you considering leveraging your home equity with a HELOC, home equity loan, or cash-out refinance? Contact a loan officer at Premier Nationwide Lending today. We’ll help you determine the best option for your goals and budget.

Premier Nationwide Lending is an Equal Housing Opportunity lender. Sponsored by NTFN, Inc. 6201 West Plano Parkway, Suite 100, Plano, TX 75093 | NTFN NMLS 75333.

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