Cash Out Refinance vs Home Equity Line of Credit (2024)

FAQs

Is a cash out better than a HELOC? ›

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For homeowners who prefer fixed rates, a cash-out refinance will be more comfortable, as their payments won't change over time. But if you're comfortable with an adjustable rate, HELOCs may offer you access to more equity overall. As we've noted, HELOC interest rates are generally a little higher.

Alternatives to a HELOC

If you know exactly how much you need upfront, and plan to spend it promptly, a home equity loan could be a better option than a HELOC. Cash-out refinance: A cash-out refinance replaces your existing mortgage with a new loan that has a bigger balance.

While a HELOC works like a credit card — giving you a maximum amount you can borrow with a variable interest rate — a home equity loan works more like your mortgage. You get a lump sum of money, and you repay it on a set schedule with a fixed interest rate.

While home equity loans and HELOCs typically have higher interest rates, they may be a better option than a cash-out refinance if their rates are comparable to your current mortgage rate, especially if you're only borrowing a small amount of money.

The disadvantage of the cash-out refinance includes the new lien on your home for the larger mortgage loan balance since it includes the original loan amount and the cash amount. However, you don't need to take on the added risk and higher payments of a mortgage loan at an 80% loan-to-value.

The cons are that HELOCs use your home as collateral, they can make it easy to overspend, and they have variable rates that can rise.

A home equity line of credit or HELOC provides a set amount of credit secured by your home. This line of credit does not need to be used immediately, and you only pay it back when you start using it. The limits for home equity lines of credit typically run much higher than credit cards.

Consolidating and paying off high-interest debt

Either way, a HELOC can get you out from under, as it generally offers a lower interest rate than unsecured loans, and certainly a lower rate than your credit card's APR. So it's a good choice for paying off credit cards or consolidating other types of high-interest debt.

There's a good possibility that HELOC rates will drop again in 2024. The Federal Reserve has hinted at reducing interest rates, which could influence the rates for Home Equity Lines of Credit (HELOC) as well. As inflation cools, borrowing costs may decrease.

What is the monthly payment on a $50,000 home equity line of credit? ›

Calculating the monthly cost for a $50,000 loan at an interest rate of 8.75%, which is the average rate for a 10-year fixed home equity loan as of September 25, 2023, the monthly payment would be $626.63. And because the rate is fixed, this monthly payment would stay the same throughout the life of the loan.

Watch out for balloon payments: If you don't manage your HELOC monthly payments properly, you could be hit with a large “balloon payment” at the end of your repayment period. This large payment can trap you in a cycle of debt if you can't pay it off or, worse, could result in losing your home.

It's easier to get a cash-out refinance

While getting a HELOC can require a credit score of up to 720, a refinance loan usually only requires a 620.

Conventional cash-out refinance guidelines require a 640 score. Meanwhile, the VA doesn't set a minimum score, but many lenders also set their own at 620. FHA loans are the exception, and borrowers may qualify with scores as low as 500. Learn more about FHA cash-out refinances.

However, closing costs and an extended repayment period of a new mortgage may not be worth it for some homeowners. If you're wondering, "Can you pull equity out of your home without refinancing?" The answer is yes. There are multiple financing options homeowners can pursue that don't impact their current mortgage.

Summary. It's well known that the stock market reacts more favorably if a company is bought with cash than with stock. But the opposite holds true when you buy just a business unit: It's better to pay with your equity rather than cash.

A cash-out refinance can be a good idea if your home has gone up in value. It is often the best option if you need cash right away and you also qualify to get a better interest rate than on your first mortgage.

No. Cash-out refinances allow you to borrow the equity you've built in your home. Since the cash you receive from the refinance is technically a loan that your lender expects you to pay back on time, the IRS won't consider that cash as taxable income.