A home equity line of credit, commonly referred to as a HELOC, is a line of credit that allows you to tap into the equity of your home to access those funds. Similar to a credit card, you can borrow funds up to a set limit throughout the “draw period” or set time limit. These funds can be used to consolidate loans, pay off other debt, home improvement projects, and more.
A cash-out refinance is another way to leverage your current home equity. By taking out a larger mortgage on your home and paying off the current mortgage, you can pocket the difference, allowing you to access those funds. Just like with a HELOC, you can then use the extra funds for whatever you need, like debt consolidation, vacation or home renovations.
Which is right for you?
While both of these options can get you the funds you need, there are pros and cons that can help you decide whether a HELOC or a cash-out refinance is a better fit for you. In order to access either of these benefits, you’ll need to have enough equity in your home to either borrow through a HELOC or to cash out with the refinance. However, once you are qualified and approved, you can then use the funds as needed.
HELOC: Pros and Cons
A HELOC allows you to borrow funds as you need them, which can be especially helpful if your budget hasn’t been finalized or if you intend to use the funds for a variety of purposes. However, you’ll need to pay back the HELOC in addition to your current mortgage payment, which will leave you with two payments to be responsible for. Additionally, be aware that many HELOCs have an introductory interest rate which will then raise to a new rate after the introductory period.
Cash-out Refinance: Pros and Cons
When you choose to go with a cash-out refinance, you’ll receive the funds all at once. This new mortgage will replace your old mortgage and you’ll have a single mortgage payment for a new amount. This single payment makes this easy, however, there are limitations to this option. If interest rates are higher than they were with your original mortgage, then you may end up paying more in interest over the life of the new loan. You’ll also need to ensure that the funds you receive will be enough to cover whatever you’re planning for.
Whether you’re looking for a HELOC or a Cash-out Refinance, you can use the equity in your home to help you reach your goals, finish your projects, or even consolidate debt.