There are different ways to pull equity out of a home, and a lot of borrowers get lost when trying to discern between their options. Many refinance to take advantage of lower interest rates and reduce their monthly mortgage payments, while others search to add a HELOC (also known as a second mortgage) to pull equity out and use it to pay for other things such as, home repairs/renovations, paying off student loans, or the consolidation of high interest credit card debt.
A home equity line of credit (HELOC) and a cash-out refinance are both ways to access the value that has accumulated in your home. Although these loans obtain a similar end goal of cash on hand, they’re not the same.
If you already have a mortgage, a home equity line of credit or a HELOC, will be a second loan added to your home complete with its own term, interest rate and monthly payment. Whereas a cash-out refinance replaces your current mortgage with a new one. You will have only one loan and one monthly payment.
To determine which option is best for you, it’s a good idea to reflect on your current mortgage, and consider what your future financial goals are.
A home equity line of credit is essentially a second mortgage that requires an additional monthly payment. The major difference between a HELOC and cash-out refinance is rather than getting all the cash at once, a HELOC allows you to borrow what you need when you need it. There is generally a draw period during which you can access funds and make interest only payments, followed by a repayment period where you must make principal and interest payments. In other words, HELOCs act similarly to credit cards, except you borrow the equity that’s appreciated on your home. They start with a low teaser rate (typically this in effect for the first three to six months, with subsequent rate increases later). HELOCs feature adjustable rates that are tied to the Prime rate and move whenever the Prime rate changes.
A cash-out refinance replaces your existing mortgage in first position with a new, larger loan to allow you to pull out some of the equity in your home and turn it into cash to use however you would like. This is a great option if you have a lot of debt with high interest payments that you’d like to pay off, or if you want a lump sum of funds to invest elsewhere. Typically, these loans come with lower interest rates compared to HELOCs.
So, which option benefits you more?
Generally, if you are in need of the smaller amount of equity or if you’re planning on repaying your loan back in a shorter term – say six months – then a HELOC is the better way to go for most borrowers.
If you’re planning on using your equity towards remodeling your home or investing in another property and essentially need a larger loan amount, exploring a refinance may be the more prudent decision, especially if it will circulate back into appreciation in the long run. Re-investments like this make more sense for a longer term repayment period, or if you’re trying to build more equity in your home.
If you’re looking to refinance and have questions about which option is right for you, please call us at (760) 930-0569 and we will be happy to assist you.