HELOC vs. Cash-out Refinance: What’s Best For You?
If over the years you have built up equity in your home, you might wonder how to access your home’s equity without having to sell. There are several options to access your home’s equity. Two of the more popular options are a home equity line of credit (HELOC)* and a cash-out refinance**.
While both HELOCs and cash-out refinances let you tap into the value of your home, they allow you access to your built-up equity differently. But before you start accessing the equity you’ve gained in your home, you will need to first meet their qualifications.
Determining which option is best for you will depend on your needs and financial situation. To help find out which option is best for you, talk to a trusted lender today. Apply now!
What is a HELOC?
A HELOC opens a line of credit based on the value of your home and the amount of equity you have built up in your home. You can determine your home’s equity by subtracting the amount left on your mortgage from your home’s overall value. This will show you how much of your home’s total value belongs to a bank or lender versus how much belongs to you.
Traditionally, HELOCs are broken into two periods: a borrowing period and a repayment period. During the borrowing period, you can make draws on your line of credit up to a certain amount while only paying interest on your loan.
After the borrowing period ends, you will start your repayment period, during which you will have to make principal loan and interest payments. The lengths of these periods could be different depending on the lender you talk to.
Our HELOCs work a little differently. A HELOC with us will give you your total loan amount upfront, and as you pay back this amount, you will have the opportunity to make additional draws on your line of credit.
You can build up your home equity and HELOC borrowing power if your home’s value increases through changes in the market or any home improvements you make.
What is a cash-out refinance?
A cash-out refinance replaces your mortgage with a new loan, usually giving you the cash difference within a week of closing. Increasing equity through upgrades to your home, renovations or paying down your original mortgage means a bigger difference between the two loans. A bigger difference between your two loans could mean more cash you will receive during your refinance.
The new loan you receive from a cash-out refinance might come with higher interest rates and different loan terms, which could increase your monthly payments. Some borrowers do see this loan option as restarting on a mortgage that they will end up repaying for longer.
HELOC vs. cash-out refinance: key differences and similarities
Comparing the differences and similarities between a HELOC and a cash-out refinance will help you decide which option is better for you.
Loan amounts
Depending on your lender, you can borrow up to 85% of your home’s value with a HELOC. Some lenders could let you borrow up to 90% or even 100% of your home’s equity. Our HELOCs have a loan maximum of $400,000***.
Your cash-out refinance can get you up to 80% of your home’s value. If you qualify for an FHA or VA cash-out refinance1, you may have access to more of your home’s equity. FHA refinancing can get you up to 85%, while VA refinancing can get you up to 100%.
Closing costs
With a HELOC, your closing costs will be 3%-5% of your loan amount. Your cash-out refinancing closing costs are similar, typically ranging from 2% to 6% of the total loan amount.
Some lenders might offer no-closing-cost options, but these options tend to come with higher interest rates. If you don’t have the money for the upfront closing costs, ask your lender about rolling them into the loan amount.
Loan repayment
With a typical HELOC, you only have to pay interest during the draw period. During the repayment period, you will have to pay back the loan as well as interest. Similar to your original mortgage, you will have to start your monthly cash-out refinance payments upon closing.
Interest rates
Variable interest rates are common with most HELOCs, meaning that the interest you pay can vary depending on the market. This could make it harder to plan and budget monthly payments.
Your cash-out refinance can come with either fixed or variable interest rates depending on the lender and your exact situation. It is best to talk with your lender about both options to determine which is best for you.
Requirements
Some of the requirements you will need to meet to start accessing your home’s equity through a HELOC is a credit score above 639, debt-to-income (DTI) ratio lower than 51% and a loan-to-value ratio of no more than 85%.
With a cash-out refinance, lenders tend to look for a credit score of at least 620, a DTI ratio of 43% or less and a loan-to-value ratio under 81%.
However, your exact requirements may vary depending on the lender you talk with.
How to choose between a HELOC vs. cash-out refinance
Choosing between a HELOC and a cash-out refinance depends on what your needs are and the requirements you meet. A lender can walk you through your options and even give you advice if you don’t meet certain qualifications.
To know what the best way for you to start accessing your home’s equity and to see what you qualify for, reach out to a lender and learn what your options are. Apply today!
All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Owning does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error-free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Owning. Owning its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Refinancing your mortgage may increase costs over the term of your loan. Restrictions may apply.
*Owning’s HELOC is a fixed-rate open-end product using your home as collateral. Not available in all states. Go to owning.com/HELOC for information including important property and borrower requirements and restrictions which impact rate and max available loan amount. Subject to approval.
**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 Owning for more information
***Our loan amounts range from a minimum of $25,000 to a maximum of $400,000. For properties located in AK, the minimum loan amount is $25,001. Your maximum loan amount may be lower than $400,000 and will ultimately depend on your home value and equity at the time of application. We determine home value and resulting equity through independent data sources and automated valuation models.
1Using 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. VA Cash-out Refinance not available in Texas. Owning has no affiliation with the US Department of Veterans Affairs. Contact Owning for more information
