Cash-out Refinance vs. Home Equity Line of Credit: Which is Better?
If you're a homeowner with equity in your property, you may be wondering if it's better to get a home equity line of credit (HELOC), cash-out refinance or home equity loan. Here's a look at the pros and cons of each option to help you decide which is best for you.
Home Equity Line of Credit (HELOC)
A HELOC is a type of revolving credit, which means you can borrow against your home equity up to a certain limit and then pay it back over time. HELOCs typically have lower interest rates than other types of loans, and you can use the funds for any purpose.
Pros:
- Lower interest rates
- Flexibility in how you use the funds
Cons:
- You may be required to make interest-only payments for the first few years
- The interest rate may be variable, which means it could go up over time
Cash-Out Refinance
A cash-out refinance involves taking out a new loan to replace your current mortgage and then using the equity in your home to get cash back. The new loan will have a higher interest rate than your current mortgage, but the cash you receive can be used for any purpose.
Pros:
- You can use the cash for any purpose
- The interest rate on your mortgage may be lower than the interest rate on a HELOC or home equity loan
Cons:
- The interest rate on your new loan will be higher than your current mortgage
- You'll have to go through the process of getting a new mortgage, which can be time-consuming and expensive
Home Equity Loan
A home equity loan is a lump sum of cash that's borrowed against the equity in your home. Home equity loans typically have fixed interest rates, so the monthly payments are the same every month.
Pros:
- The interest rate is usually lower than a credit card or personal loan
- You'll have a fixed monthly payment, so you'll know exactly how much you need to budget for
Cons:
- You may be limited in how you can use the funds
- The interest rate may be higher than a HELOC