If you own a home, one of the perks is being able to utilize the equity to help you meet your financial goals. When it comes to leveraging your home’s equity, homeowners have a few choices, including a cash-out refinance and a home equity line of credit. These are the two most popular options for homeowners, but they are quite different in respect to the way they work, so it is important to educate yourself on the details of to see what best suits your needs.
A cash-out refinance is a mortgage refinancing option that allows you to convert the equity in your home into cash. Homeowners who opt for the cash out refinance option must obtain a new mortgage for more than what is currently owed on the home. The new loan will be used to pay off the existing mortgage with the remaining money being paid directly to the homeowner.
The main difference between a cash-out refinance and a standard mortgage refinance is the purpose of the loan. With a standard refinance, the homeowner obtains a new mortgage with a better interest rate and loan terms. The original mortgage will be paid in full while the new loan and the principal balance remain the same. With a cash-out refinance, the amount of the home loan changes to a larger amount, and then you receive a cash payout for the equity you have accumulated.
Once you receive your cash-out funds, there are several strategic ways to use this extra money. These extra funds can be used in any way you choose, including these options.
Home Improvements
Using funds for home renovations that increase property value is always a smart money move. In fact, home improvements are a popular choice homeowners make to use the extra cash from their refinancing.
Consolidating Debt
Paying off high-interest debts to reduce the overall financial burden is a great way to spend the money from the equity in your home. Getting rid of credit cards and loans with high interest rates lowers your monthly payments and saves you money on interest.
A home equity line of credit is revolving credit line that uses the equity in your home as collateral. Unlike a traditional mortgage, a HELOC acts more like a credit card allowing homeowners to borrow against the available equity in their home up to a set limit, pay off the balance, and borrow again during the draw period.
Home equity line of credit terms vary with different institutions. At CCCU, your funds can be accessed for up to 15 years, meaning you can borrow money any time within that period, repay some or all of it, and borrow again.
Most HELOCs have variable interest rates that change with the market, and with good credit, the rates are usually competitive because your home is being used as collateral. At CCCU you can also choose to lock in your rate for 5 or 15 years!
Homeowners often use HELOCs for home improvements or renovations when the total project cost is not yet known. But there are plenty of other reasons to leverage the equity in your home. Here are a few uses for a home equity line of credit:
Funding Major Expenses
Many homeowners use the extra funds from a home equity line of credit to fund large purchases without predictable costs. A great example is funding you or your family’s education expenses or a large event such as a wedding.
Emergency Fund Backup
Setting up a safety net for unexpected financial emergencies is also a great use of funds from a home equity line of credit. Having access to additional money means financial security for your future, giving you peace of mind knowing your family is secure.
Accessing the equity you have built in your home is a great way to pay for larger purchases and expenses. A cash-out refinance replaces your existing mortgage with a new one, while a home equity line of credit is a totally separate loan that you will need to pay in addition to your original mortgage payment. There are some other differences and factors you should consider when choosing between a cash-out refinance vs a home equity line of credit.
Interest Rates and Loan Terms
Cash-out refinancing can offer better interest rates and loan terms, particularly when rates are low. However, if you need more flexible access to funds or anticipate future rate drops, a HELOC with a variable rate may be a more suitable option. This is especially true if your current mortgage has a low interest rate and you prefer not to replace it with a new, potentially higher-rate mortgage.
Impact on Existing Mortgage
A cash-out refinance replaces your existing mortgage with a new, larger one, resulting in a higher monthly payment over the life of the loan, typically for 15 to 30 years. A home equity line of credit keeps all aspects of your mortgage the same but adds another loan which requires a separate monthly payment. With a HELOC, you can borrow and repay money multiple times, only paying interest on the amount you’ve withdrawn.
Evaluating your financial goals and current mortgage status is the best way to determine if a cash out refinance or home equity line of credit is best for you. Both of these options offer strategic ways to access the equity in your home, and it is important to consider which works best for your unique situation. Contact your trusted local lender to learn more about which option works for your financial goals to utilize the existing equity in your home.
CCCU is here to help find a mortgage solution to fit your needs. Apply online or visit any of our branch locations, contact our mortgage team, or give us a call at 503.963.6666.
If you still have questions about which is better cash-out refinance vs. home equity lines of credit, download our free checklist "Refinancing Your Mortgage: A Comprehensive Guide to Help Leverage Your Home's Value"