Home equity lines of credit (HELOC) and cash-out refinances are two ways to turn your home’s current value into funds you can use to accomplish other goals, such as paying for home improvements or consolidating debt.
HELOCs are often mentioned in the same context as cash-out refinances. But while both allow you to tap your home equity, the portion of your home you actually own, the two financing options aren’t exactly the same and have different benefits.
Are you looking for a way to leverage your growing home equity? Let’s take a closer look at refinance vs. home equity line of credit.
Refinance vs. Home Equity Line of Credit Defined
Although these loans seem similar, there are significant differences that should be considered.
With a HELOC, you get the cash by borrowing against your home equity, which is the difference between the current value of your home and the amount left to pay on your mortgage. If you already have a mortgage, a HELOC will be a second payment to make.
On the other hand, a cash-out refinance replaces your current mortgage with a new one complete with its own term, interest rate, and monthly payment. You will continue to make just one monthly payment.
How you access the money with a refinance vs. home equity line of credit is also different. Cash-out refinances offer a lump sum. HELOCs let you pull out money as needed. Most HELOCs also come with adjustable interest rates. Be prepared for your monthly payment to change over time.
The Costs of Refinancing
A cash-out refinance gives you the flexibility to change the terms of your original loan, saving you money in the long run. In other words, if you qualify for a lower interest rate or shorten the loan term, you could reduce the amount of interest you pay over the life of the loan.
Also, repaying a cash-out loan requires a single monthly payment. This could be easier to budget for vs. possibly having two monthly payments when using a HELOC.
Baton Rouge Telco’s fees only include a $50 application fee, $60 processing fee, and an origination fee of 1% of the total loan amount at closing (not to exceed $4,000). The origination fee can be waived with 0.25% added to your qualifying interest rate.
The Costs of a HELOC
Unlike cash-out refinances, which come in both fixed- and variable-rate options, HELOCs almost always have adjustable interest rates. You’ll want to be prepared for the inconsistencies, especially if you’re sticking to a strict budget.
At the beginning of a HELOC, you typically make interest-only payments, helping keep your costs low. But once that period ends (we offer terms up to 10 years), you’ll start making bigger monthly payments. Don’t forget, all HELOC payments are in addition to your existing mortgage payment. They don’t replace your current mortgage loan.
Our HELOCs at Baton Rouge Telco offer a minimum loan amount of $10,000 and you may borrow up to 90% of the combined value of your home. Overall, these lines of credit have lower closing costs than other home equity loans. They can also be a great source of emergency funds.
Which Is Better for You?
When contemplating a refinance vs. home equity line of credit (HELOC), the best option depends on your personal finances. You want to consider what your current mortgage rate is, the amount of equity you have in your home, and why you need the money.
A HELOC is best if you’re not sure how much you need, you want access to cash for an extended period, or you’re not interested in replacing your current mortgage loan’s rate or terms.
If you have a set amount of costs you’re trying to cover, you’re trying to consolidate debt, or you could benefit from replacing your existing mortgage loan with a new one, a cash-out refinance is the better option.
Refinance vs. Home Equity Line of Credit: We Can Help!
Taking out any kind of loan against your home is a big decision. It is important to research each option to determine which is right for you. The professionals at Baton Rouge Telco are here to help.
Remember, choosing the right lender is as important as the loan you pick. As a credit union, we are here to serve you. Click below to choose which option works best for you at Baton Rouge Telco!