Homeownership comes with a unique financial perk: home equity.
If you’ve been paying off your mortgage (or your property’s value has increased), you’re likely sitting on a decent chunk of untapped equity. And that equity can be turned into cash, either through a cash-out refinance or a HELOC.
Knowing which one is right for you comes down to understanding how they compare. Both options can give you access to funds, but they work very differently.
So let’s break it down.
The Process
With cash-out refinancing, you get a lump sum upfront when you refinance your existing mortgage for more than you owe. You walk away with that extra amount in cash, minus closing costs, and then start paying off the new, larger mortgage.
This option is ideal if you need a large one-time payout, such as for:
- Home renovations
- Tuition fees
- Debt consolidation
A HELOC, on the other hand, works more like a credit card that is tied to your home’s equity. You’re approved for a credit line, and you can borrow as you need during the draw period. You’re only charged interest on what you use.
It’s best for ongoing or unpredictable expenses, like remodels or medical bills.
Effect on Mortgage
A cash-out refinance allows you to replace your current mortgage with a new one. That also means a new:
- Interest rate
- Loan term
- Set of monthly payments
But with HELOC, you keep your existing mortgage exactly as it is. It’s a second loan that you can borrow from lenders like AmeriSave, on top of your original mortgage. That means two separate payments, but you don’t lose a great mortgage rate if you already have one.
Repayment Terms
You start paying principal and interest on the cash-out refinance amount immediately, just like a regular mortgage. It’s predictable and stable, especially if you choose a fixed-rate mortgage.
You’ll likely have 30 or 15 years to repay, depending on the loan you choose.
During the HELOC draw period, you may only have to pay interest on the amount you borrow. After that, you enter the repayment phase, where you must start paying both principal and interest, usually over 10 to 20 years.
Interest Rates
Most cash-out refinances come with fixed interest rates. This means your monthly payments won’t change over time, making it easier to budget and predict.
However, your rate depends on current mortgage market conditions, and you might be trading a low rate for a higher one if you refinance now.
Most HELOCs, on the other hand, have variable rates. This can be helpful if rates are low, but they can increase, making payments unpredictable in the long run.
Some lenders offer fixed-rate conversion options for borrowed amounts, but this varies.
Which One Should You Choose?
Go with a cash-out refinance if you:
- Want a big lump sum upfront
- Are okay with replacing your mortgage
- Can get a decent interest rate.
Go with a HELOC if you:
- Want flexible access to funds
- Don’t want to touch your current mortgage
- Are okay with variable payments.
