HELOC vs Cash-Out Refinance? A home equity line of credit (HELOC) and a Cash-out Refinance are two popular options for homeowners looking to tap into the equity in their homes. Both can be used to access cash for various purposes, such as home improvements, debt consolidation, or investments. However, there are some key differences between the two options that homeowners should consider before making a decision.
HELOC vs Cash-Out Refinance Loan Structure
One of the main differences between a HELOC and a cash-out refinance is how the loan is structured. A HELOC is a line of credit, similar to a credit card, that allows homeowners to borrow against the equity in their home as needed. Homeowners can draw on the line of credit as needed and only pay interest on the amount they borrow. On the other hand, a Cash-Out Refinance is a new mortgage loan that pays off the existing mortgage and provides the homeowner with cash at closing. With a cash-out refinance, the homeowner is responsible for paying interest on the entire loan amount.
HELOC vs Cash-Out Refinance Loan Length
Another difference between a HELOC and a Cash-out Refinance is the length of the loan. A HELOC typically has a draw period, during which the homeowner can access the line of credit, and a repayment period, during which the homeowner must pay back the borrowed amount. The length of these periods can vary, but the regular structure is a 10-year draw period and a 20-year repayment period. A cash-out refinance, on the other hand, is typically a 30-year fixed-rate mortgage.
Interest Rates
The interest rates for a HELOC and a cash-out refinance also differ. The interest rate on a HELOC is typically variable and based on the prime rate. This means that the interest rate can fluctuate with market conditions. On the opposite, a Cash-Out Refinance typically has a fixed interest rate, which means that the interest rate does not change over the life of the loan.
Fees and Closing Costs
Finally, the fees and closing costs associated with a HELOC and a cash-out refinance are different. Closing costs for a HELOC are typically lower than those for a cash-out refinance because a HELOC is not a new mortgage loan. However, some HELOCs may have annual fees or other ongoing costs.
In conclusion, a home equity line of credit (HELOC) and a cash-out refinance are great options for homeowners to tap into the equity in their homes. However, what’s best depends on the homeowner’s goals, needs, and financial situation. A HELOC might be a better option for homeowners who only need to borrow a small amount or want the flexibility to borrow as needed. A cash-out Refinance might be a better option for homeowners who need a higher lump sum of cash or want a fixed interest rate.
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