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

Have you been watching your home's value increase over the years and want to leverage that equity?

If so, there are several reasons why you might consider tapping into this valuable asset, such as debt consolidation or even buying a new place.

To access the value in your home, there are two paths: cash-out refinancing or a Home Equity Line of Credit (HELOC). With either route, it’s possible for homeowners to put some extra dollars in their pockets!

The question is: Which is the best option for you?

Cash-out Refinance

Refinancing your home can be like getting a fresh start because you're exchanging an existing loan for another one with different terms. With cash-out refinancing, you have the added advantage of receiving a lump sum payout upon closing. Plus, this strategy gives you the flexibility to choose from fixed- and adjustable-rate mortgages (ARMs) to best meet your needs.

Let’s say you own a home worth $500,000, owe $100,000 on your existing mortgage, and you could use $100,000 for some much-needed home renovations. If approved for a cash-out refinance for $200,000, at closing you could pay off the $100,000 you owe on your old mortgage loan and replace it with a new $200,000 loan that would give you a new mortgage payment. You'd be left with $100,000 in cash for your renovations.

A cash-out refinance of a mortgage does have closing costs, so if you don’t want to pay that out of pocket, you may want to request a bit more than the minimum you need. Closing costs for a refinance average around $4,000, although they may be significantly higher or lower depending on your individual circumstances, so be sure to ask your loan officer for an estimate.

Home Equity Line of Credit (HELOC)

A HELOC is a second mortgage that adds a lien onto the property, similar to a first mortgage. When you take a second mortgage, you may have two separate payments each month, one for your first mortgage and one for your second one.

Using the example above, instead of adding $100,000 to your existing mortgage, you could take out a separate $100,000 HELOC. Then you can tap into your home’s equity as you need instead of all at once as with a cash-out refinance. This can be helpful if you're needing a $30,000 deposit for the contractor one day, another $10,000 in a hardware store purchase a week later, and a final deposit due to the contractor a month after that.

Because HELOCs can serve as revolving debt, it is recommended that you apply for a HELOC with a higher limit than you actually need. Using all of the available funds in your HELOC can negatively impact your credit score. So in this example, if you need $50,000 for home improvement, it would be recommended that you apply for a $100,000 limit, so that using $50,000 will leave ample availability and won’t have as big of an impact on your credit score.

Hanscom FCU offers the 3-in-1 Home Equity Advantage Plan, comprised of a line of credit, fixed-rate loan option, and a Platinum credit card. This type of mortgage will have a limit that you can borrow against, and when you pay the loan back, that money becomes available to you again, similar to a credit card. The interest rates on HELOCs are typically adjustable, although Hanscom FCU does offer options for you to lock in a rate once you have drawn money from your line of credit. In addition, the 3-in-1 Home Equity Advantage Plan offers the flexibility of an interest-only payment or a principal and interest payment. An interest-only payment would not pay down the balance of your loan, but it provides a lower monthly payment. The line of credit interest rate is tied to the Wall Street Journal Prime Rate.

Ultimately, these are the two different avenues you can take to use the equity from your home to get cash. Knowing what you know now, it’s still always best to speak with an experienced loan officer to help you make the best financial decision for your needs.

You can reach either Scott Barry at 781-382-8455 or Liz Clarke at 781-382-5064 in order to get started accessing your equity today with either a Hanscom FCU Cash-Out Refinance or the 3-in-1 Home Equity Advantage Plan.

Pros of Cash-Out Refinance:

Choose between a fixed- or adjustable-rate mortgage (your rate will not vary on a fixed, and it could change less frequently with an ARM)
You have one payment every month.
Your interest rate may be slightly lower than with a HELOC.

Pros of HELOC

You only make payments on what you've drawn from your line of credit.
A variable rate, so your interest rate will go down if rates drop in the future.*
You can lock in an interest rate on the portion of funds you draw from your line.

*Interest rates for a HELOC may increase or decrease over the life of the loan.