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HELOC or cash-out refinancing: Which is best?

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Tip: Before you tap into the equity you have in your home, consider how you'll use the funds, your current financial situation, and your future plans.

Assuming you'd like to stay put, the two most common — but very different — options for converting your home's equity into cash are: cash-out refinancing1 and a home equity line of credit (HELOC).1 When it comes to deciding between the two, you need to consider why you want to tap into your home equity, your current financial situation, your future plans, and your end goals.

Let's examine these options — and explore which makes the most sense for you.

Cash-out refinancing

A cash-out refinance is a type of mortgage refinancing. Here's how it works: you apply for a new loan that's greater than the amount of your existing mortgage but less than the current value of your home. You then use the money from the new loan to repay your original mortgage — and pocket the rest of the cash to use as you please. Then, you continue making monthly mortgage payments until the loan is repaid in full.

With cash-out refinancing, you make monthly payments at a set interest rate until the amount you borrowed is repaid. While there are different loan terms you can choose from when you refinance, the most common are 15-year and 30-year loans.

Home equity line of credit (HELOC)

A HELOC, or home equity line of credit, is a line of credit that's based on the equity in your home and separate from your mortgage. The equity in your home serves as collateral for this line of credit.

With a HELOC, you can borrow the amount you want whenever you want, provided that the line of credit is open and you have credit available. During the period of time you can borrow from your HELOC — known as the draw period — you must pay at least the interest on whatever your outstanding balance is. At the end of the draw period, you enter the repayment period, where you must repay any outstanding balance. A common term for a HELOC is 25 years, with the draw period lasting 10 to 15 years and the repayment period lasting another 10 years.

Which is right for you?

One size does not fit all when it comes to making the decision on cash-out refinancing or getting a HELOC. Since it all depends on your personal situation, here are some scenarios to help illustrate which approach might be a better fit:

  • If mortgage rates are considerably lower today than they were when you got your mortgage, consider a cash-out refinance. This will help you access the cash you want while potentially saving you money on your mortgage in the long run.
  • If you want a lot of flexibility, consider a HELOC. These work similarly to credit cards, in that it's a revolving line of credit and you only pay interest on what you borrow. You have the option to borrow a large sum, but if you borrow just a small amount, you'll pay interest only on what you used (not the full amount available).
  • If you want a fixed interest rate with a set payment schedule, you'll likely want a cash-out refinance. HELOC interest rates are variable. If you refinance to a fixed-rate mortgage, you know exactly how much you'll owe each month.
  • If you need access to your equity fast, a HELOC likely makes the most sense because the approval and origination process is much easier and faster. This is great for things like home renovations or improvements.

Bear in mind, cash-out refinancing and a HELOC are only two options for leveraging your home's equity. Other options, such as a home equity loan, might make more sense based on your financial situation. To help you decide what's best for you, talk to a trusted local banker or mortgage loan originator.

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This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

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