Comparing the Best Ways to get Equity out of your Home: HELOC vs. Home Equity Loan vs. Cash-Out Refinancing

With home prices near all-time highs homeowners are increasingly considering their home equity as a financial tool. Tapping into your home’s equity gives you the opportunity to pay for major expenses, credit card debt, home renovations or maybe even a much needed vacation. There are three main ways to take advantage of your homes equity: a Home Equity Line of Credit (HELOC), a Home Equity Loan and a Cash-Out Refinance. We’ll explore the differences below.

What is Home Equity?

Home equity is the difference between your home’s current market value and what you still owe on your mortgage. Most people start building equity with their down payment, it grows as you pay off your mortgage and as your home’s value increases. Things like renovations or changes in your neighborhood’s property values can also impact how much equity you have.

How does a HELOC work?

A Home Equity Line of Credit (HELOC) operates similar to a credit card that is secured against your home. Offering a revolving line of credit, it allows you to borrow and repay funds on an as-needed basis during a specified period of time. After that, you’ll pay back the amount you borrowed in installments. HELOCs are considered a type of second mortgage and the amount you can borrow will depend upon your home’s current equity. HELOCs are ideal for projects or expenses with fluid budgets, such as extensive home renovations.

Exploring Home Equity Loans

A Home Equity Loan, also known as a second mortgage, allow homeowners to borrow against the equity they have in their homes. The loan amount is based on the difference between the home’s current market value and the balance left on the current mortgage. This is a second loan that is separate from your original mortgage. After the home equity loan closes, you’ll receive a lump-sum payment from your lender. Which you can use however you please then you’ll repay in monthly installments.

What is a Cash-Out Refinance?

Then there’s the Cash-Out Refinance, which involves refinancing your existing mortgage to a larger loan, allowing you to withdraw the difference in cash. Essentially, you’re exchanging your current mortgage for a new one with potentially more favorable terms, such as a lower interest rate, while simultaneously converting some of your home equity into cash. One drawback is the potential closing costs and fees associated with refinancing. If you’re dreaming of undertaking a major house renovation that promises to increase property value a Cash-Out Refinance could provide the necessary funds and possibly lower your interest rate on your mortgage.

Key Differences

Interest rates for a HELOC are typically variable, while a Home Equity Loan offers fixed rates. Cash-Out refinancing typically offers the lowest interest rates. HELOCs allow for continual borrowing, similar to a credit card, while Home Equity Loans and Cash-Out refinancing deliver a one-time payout. When considering these options, it’s vital to weigh factors such as fluctuating interest rates against the certainty of defined payment plans. Additionally, fees associated with either option can vary, impacting the overall cost of borrowing.

What’s best for you?

Talking to a professional lender can help guide you through some of the nuances, helping you make the best informed decisions based on your financial situation. We’ve partnered with Quicken Loans to match you to top lenders in your area who can answer your questions and help you get you the lowest rate available to you. To get started click the link below and answer a few basic questions. There’s no obligation and it costs you $0.