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HELOC vs Cash-Out Refinancing: What’s the Difference?

How you decide to use your HELOC or cash-out refinance can have a big impact on what type of loan you choose.

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Most homeowners have acquired a serious amount of equity over the past few years. In fact, the average homeowner now has more than $274,000 in equity According to a recent report by CoreLogic.

That’s a good thing — especially with inflation high and a potential recession on the horizon, an increased amount of equity allows you to tap into that value to access money when you need it. With home equity on your side, you can consider products like Home equity lines of credit (HELOCs) or cash-out refinancingBoth offer cash in a pinch.

Are you thinking of taking out a loan against your home equity? Here’s what to know about HELOCs and cash-out refinancing.

Start here by comparing home equity rates you can qualify for today.

What is a HELOC?

A HELOC A line of credit based on the equity in your home. You can withdraw money from it as needed for an extension Time is up – Usually up to 10 years. During that time, you usually have to pay interest on what you borrowed.

Once that initial draw period is over, you start repaying what you borrowed in monthly payments or lump sum balloon payments.

“I recommend when clients are looking for flexibility and need to adjust their borrowings to finance projects such as home renovations, education expenses, or costs spread over time,” said Carolina Gerdotts, executive vice president of RelatedISG Realty. “I’ve had clients use HELOCs to offer a down payment on their next home, which helped them become a landlord while renting their first property.”

It’s important to note that HELOCs typically have variable interest rates, so the rate you pay will change monthly and fluctuate as the broader rate environment changes.

“This means that if interest rates rise significantly like they did last year, your monthly payments could increase and significantly impact your budget,” says Ryan Schuchman, partner at Cornerstone Financial Services.

Learn about the HELOC rates available to you here!

What is a cash-out refinance?

Cash-out refinancing When you replace your current mortgage loan with a new one that has a larger balance than your loan. The new loan pays off the old loan, and you get the difference in cash back.

with Cash-out mortgage refinancingYou’ll get a lump sum that you can use for anything you like and pay it back as part of your monthly mortgage payment.

“Cash-out refinancing can be a solution when you need an immediate lump sum of cash to cover specific expenses, such as high-interest debt consolidation, an essential purchase, or high unexpected medical expenses.”

However, because Cash-out refinancing By adding to your mortgage balance, this can often mean higher monthly payments. Since you’re refinancing, you’ll also lose your current mortgage rate — something to consider if you’ve locked in a very low rate in the past few years.

Compare today’s best rates here to see how a cash-out refinance can help tap into your home’s value today.

How are HELOCs and cash-out refinances similar?

Both HELOCs and cash-out refinances allow you to borrow against your home equity. They come with no restrictions on how you can use the funds, and they can give you extended time to pay off your balance (usually up to 30 years).

With either product, you may qualify for one Tax deductions As long as you use the funds to buy, build or substantially improve your home, according to the IRS.

How are HELOCs and cash-out refinances different?

That’s where the similarities end, because HELOCs and cash-out refinances are really quite different. For one, HELOCs come with more flexibility over longer terms.

“A HELOC allows you to borrow, pay back, and borrow again as often as you want,” Schuchman says. “A cash-out refinance involves borrowing a fixed amount, which you can pay back early if you want, but does not allow for additional debt without a subsequent full refinancing process.”

The interest rates of the two also differ. HELOCs almost always come with a variable interest rate, which can cause your payment to fluctuate over time. Cash-out refinancing can be done with a variable or fixed interest rate (the most common option).

Finally, how they approach your principal mortgage loan differs. With a cash-out refinance, you completely replace your current loan. HELOCs, on the other hand, are a type of second loan – one that is in addition to your existing mortgage. That means you’ll have two payments each month instead of one.

Other home equity options

These aren’t your only options if you’re looking to tap your home equity.

Home equity loan Another possibility you can explore. This loan is a type of second mortgage. Like a cash-out refinance, you’ll receive a single payment and you’ll pay off the balance monthly over 10 to 30 years. These usually have fixed interest rates.

reverse mortgage Another option for homeowners 62 and older. If you’ve paid off or are close to paying off your mortgage, you can access your home equity with a single or monthly payment. You are only responsible for repaying the equity once you sell, move or move your home.

Compare rates today to find the best way to access your home equity right now!

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