HELOC vs. Cash-Out Refi

So what if you're a homeowner and you've decided that you'd like to stay where you live, but with some considerable upgrades that require extra funds? There are two options: a Home Equity Line of Credit (HELOC) or a cash-out refinance. But which one is right for you? Each option comes with it's own pros and cons, so let's dive in.

Home Equity Line of Credit (HELOC)

A HELOC is a type of loan that allows homeowners to borrow against the equity they have built up in their homes. Essentially, it acts like a credit card with a predetermined credit limit that can be borrowed from as needed. One of the main benefits of a HELOC is its flexibility. When you have. HELOC, you need to pay interest only on the amount you've borrowed, and can use the funds for various purposes, including home renovations.  Another advantage is that the interest rates on a HELOC are usually lower than those of other loans, providing the flexibility to repay the borrowed amount at your own pace.

The downside? With a HELOC, the interest rates could be variable, meaning they could go up over time, resulting in higher monthly payments. Additionally, since a HELOC acts like a credit card, it could be tempting to borrow more than you need or can afford, leading to potential debt issues. 

Cash-Out Refinancing (Refi):

A cash-out refinance involves refinancing your existing mortgage for a higher amount than you currently owe on your home and taking out the difference in cash to use as you please - this means you have the benefit of utilizing the equity you've gained on your home now, without selling your home.  This would gives homeonwers a lump sum of money upfront. One of the benefits of a cash-out refi is a fixed interest rate, which provides stability and predictability in monthly payments. Additionally, the interest paid on a cash-out refi may be tax-deductible, which could result in some tax savings.

The downside? Refinancing an entire mortgage also means higher closing costs and a longer repayment term, potentially increasing the total amount paid over the life of the loan.

In summary:

Pros: flexibility to borrow as needed, lower closing costs
Cons: variable interest rates, potential to overspend

Pros: fixed rate, lower payments
Cons: higher closing costs, can reset your mortgage loan term

Not sure what's best for you? Give us a call and we'd be happy to offer guidance on which option will help you reach your goals.

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