If you’re interested in borrowing against your home’s available equity, you have choices. One option is to take out a home equity line of credit (HELOC). Another option is to refinance your mortgage loan and get cash out. Determining whether a HELOC or cash-out mortgage refinance is right for you is different for every individual, so it’s smart to compare your options to determine the right choice for you.
Here are some of the key differences between a cash-out refinance and a home equity line of credit:
Cash-out mortgage refinance
- A cash-out refinance replaces your existing mortgage with a new home loan. Depending on the existing terms on your mortgage and the additional cash you take out, you could end up with larger monthly payments and will possibly extend the timeframe for paying off your mortgage.
- You may incur closing costs associated with refinancing, which generally range from 3% to 6% of the total refinanced amount.
- Interest rates tend to be lower than other options like HELOCs and home-equity loans.
Home Equity Line of Credit (HELOC)
- If you currently have a good interest rate on your mortgage, obtaining a HELOC will allow you to maintain that rate while still obtaining cash to use however you see fit.
- Usually, you can borrow up to 89.9% of the value of your home, versus 80% with a cash-out refinance, and closing costs are lower with a HELOC.
- Know that you will be making two payments on your house versus one – your existing mortgage and your payment on the HELOC.
Before deciding whether to apply for a HELOC or a cash-out mortgage refinance, consider how much money you really need and how you plan to use it. Factor in interest rates, fees, monthly payments, and tax advantages as you weigh your options.