HELOC, Home Equity, Or Cash-Out Refi

If you need to tap into your home equity for significant investments, home improvements, cash-out refinance, or new home purchases, there are three options available. Let's look at each mortgage product in detail to help you decide which one is best for your needs.

Home Equity Line of Credit (HELOC)

The HELOC home loan is adjustable-rate and can be accessed much like a credit card. A home loan can be borrowed up to a credit limit. Then, you will have to repay it over usually 10 to 20 years. After that, your payment will be determined by your monthly balance.

HELOCs might only require you to pay the interest on any outstanding balance. Some HELOCs only need you to make principal and interest payments. Your payment will not be reduced, but the balance will be paid.

A HELOC can be used as a second mortgage on your primary mortgage. However, it does not necessarily have to. For example, if you don't have any first mortgage, a HELOC can be your sole loan.

HELOCs let you buy with a much higher payment than you need. However, lenders will need to account for future rates or payments, as HELOC rates are adjustable.

Many HELOCs offer a fixed-rate draw or advancement options that allow you to withdraw a portion of your HELOC balance at an agreed rate. Fixed-rate rates will not protect you from future rising rates, but they are usually higher than the HELOC rate at the time of the fixed-rate draw.

HELOC rates are calculated by adding the Prime Rate to a base rate. This is called a margin. The Prime Rate can move as the Fed adjusts rates each year. Your margin will be determined by your credit score and your equity in your home.

Positives

You can use HELOCs to get cash whenever you need it. You can access some money whenever you need it with HELOCs.

A HELOC is a loan that can be used to fund your home equity. HELOCs are lower than home equity loans and have low-interest rates. This has been the case with our HELOC since 2008.

Fixed-rate advances let you set a rate to cover high, one-time costs such as home renovations.

Negatives

HELOC rates are adjustable. As mentioned, the Prime Rate moves when the Fed adjusts rates. This happens when the Fed meets 8x per year. Therefore, in an economy that is growing, HELOC rates may rise because the Prime rate will also increase. Discuss with your lender how much your HELOC rates might rise.

You can amortize a fully amortized amount over 20 years if it is not yet paid. However, this could increase your monthly payments. Ask your lender for information about payment options.

Refinance your first mortgage requires approval from an existing HELOC lender. The HELOC will then be placed in the second lien position after the first mortgage. This process may take longer than the rate lock period of a first mortgage, and it can be denied. Make sure your HELOC lender knows about the timing before you commit to a new refinance.

Home Equity Loan

It is what it really is.

In that it is a lump-sum loan, a home equity loan is more straightforward than a HELOC. This is a second mortgage that is placed in the second lien position following a first mortgage. This is different than a HELOC which may be your only mortgage. For example, you would receive a cash-out to refinance if you own your home but need cash in a lump sum.

HELOC and home equity loan rates are often compared. However, a home equity loan rate will usually be higher than a HELOC because it is a fixed-rate loan.

Because it is a second mortgage, a home equity loan can be more costly than a cash-out refinance.

Home equity loans can be qualified for, with fixed terms of either 20 or 30 years.

Positives

Home equity loans can be understood more easily than HELOCs because they are fixed-rate loans.

Home equity loans can help you avoid mortgage insurance. Lenders might require mortgage insurance if the amount of your first mortgage exceeds 80 percent of the property's value. This monthly fee is an additional cost. You can put down 10 percent on your first mortgage to get a 10 percent home equity loan. This will eliminate the need to obtain mortgage insurance.

Negatives

To qualify for home equity loans, you must have enough cash on hand. If you do not have the money right away, you will be charged a monthly charge and interest.

As you pay off the loan, your home equity loan payment will not change. Because it is fully amortized, your monthly payment will not vary. While principal and interest will be paid overtime, your monthly payment will remain the same.

Cash-Out Refinance

A cash-out refinance is a first mortgage that allows money to be taken from your home. Cash-out refinances would have a lower amount and incur fewer closing costs, which would equal your home's total value. A cash-out refinance is a loan that exceeds your home's current loan balance. Your net proceeds would be the difference between the current amount and the new amount.

A cash-out refinance is a better option than a HELOC. Because it is the first mortgage, cash-out refinance rates are typically lower than HELOC.

Because cash is taken at a higher rate than traditional refinance rates, they are less expensive than cash-out refinance.

Cash-out can be done at fixed or adjustable rates. Fixed rates are eligible for the payment. The payment is often accepted for fixed rates. Because rates could rise in the future, they are suitable for the price.

If you have a prior second mortgage, you can combine a HELOC with a home equity loan and a second mortgage to form a consolidation loan. The options available to you will depend on your equity. Ask your lender for details.

Positives

The best way to get cash out of your home is through cash-out refinance, Which is cheaper than home equity loans and HELOCs.

You can consolidate higher interest non-housing debt like credit cards with a cash-out refinance. This will allow you to obtain a home loan at a lower interest rate.

Negatives

Interest paid on cash borrowed beyond the original loan amount at purchase is not subject to the tax deduction. The IRS allows only "Home acquisition debt" to be deductible. Money borrowed later is not tax-deductible. This is an essential fact about the IRS rules. For more information, see home acquisition debt rules.

Refinance rates for cash-out are typically higher than those for cash-out. In addition, you must have more equity than traditional refinances to qualify for cash-out refinances. Ask your lender for assistance in determining what you are eligible.