HELOC vs. Cash-Out Refinance: Do You Know the Difference?

HELOC vs. Cash-Out Refinance: Do You Know the Difference?

We can help you make the choice between a HELOC vs. cash-out refinance.

If you’re like most Americans, there’s no bigger purchase you’ll make in your lifetime than buying a home. A home is an investment, and there’s a return on that investment in the form of equity. Yet many homeowners won’t be able to access that equity unless and until they sell their home. So what if you don’t want to sell your home? That’s your equity-shouldn’t you be able to use it?

Since selling your house isn’t a viable solution for everyone, lenders have come up with ways to help homeowners access their home equity so that they can pay for all kinds of things: home renovations, investing in real estate, vacations, car and student loans, and even credit card debt. Your home equity is a precious resource. It’s a wonderful thing to have, and when you find a mortgage lender that can help you tap into it and use at your discretion, it can open up a world of possibilities that has been stored up for the years you’ve been owning your home.

But you know what they say: with great power comes great responsibility. And home equity is not only a precious resource, it’s a powerful resource. So while tapping into your hard-earned home equity sounds like a great way to fund your plans and dreams, it should be handled with care.

There are some methods to using your home equity that are better than others. Of course, this depends on your particular needs. Ask yourself what’s your purpose for using your equity and you’ll be off to a great start. Because without a clear, defined purpose for the funds, it can be tempting to blow cash like that on petty expenses.

Learning the Hard Way

Homeowners who tapped into their home equity (some as much as 100% of their home value) during the housing bubble learned their lesson the hard way. Without limitations on how much they could access, and without giving careful thought as to what they wanted to use it for, many homeowners found themselves upside-down on their mortgages when the bubble burst and home values plummeted.

Thankfully, there are limitations in place to keep such disaster from happening again. To help you avoid the pitfalls and decide the best way to access your home equity, we’re going to look at two different methods: home equity line of credit (HELOC) and cash-out refinance.

HELOC 101

A HELOC is a type of loan that allows you to borrow against your home equity and, like a revolving line of credit, you can use that cash how you want as long as you pay it back. (Imagine it like a credit card that’s connected to your home equity rather than your bank account.) A HELOC is another loan in addition to your mortgage, meaning you’d have another monthly payment.

Even though many homeowners benefit from this kind of loan, HELOCs have a number of disadvantages. While their closing costs may be lower than that of payday loans in Lafollette TN other loans, you may face several different types of fees imposed upon you throughout its course, such as an annual fee or an inactivity fee. HELOCs also tend to come with an adjustable interest rate, which can be problematic for a few reasons: no fixed payments, budgeting can be more difficult, and the rate fluctuates with the market (and we know the market can be unpredictable).

HELOCs offer the option of interest-only payments for a period of time. But when you’re not required to pay down the principal, you run the risk of making payments for a lot longer than you need to. Speaking of interest, the good news with HELOCs is that the interest paid may be tax deductible. However, since the tax bill that passed in 2017, borrowers can only deduct the interest on a HELOC if they used the money to build on or improve the home that secures the loan.

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