When looking to use your home equity to take cash out, there are two essential options: Cash-Out Refinance or a HELOC (Home Equity Line of Credit).  There are pros and cons to both, but which is right for each situation?

Cash-Out Refinance

A Cash-Out Refinance is essentially a do-over of the mortgage, changing it to the current terms of the market. The homeowner then borrows from the equity that they have built in the home at a fixed rate and payment schedule.

Then the borrower pays off the loan on the higher amount.

Home Equity Line of Credit

A home equity line of credit, or HELOC, is a credit line that is secured against the house.  Mostly lent at an adjustable rate and with interest only payments for a specific time (specified per deal) and have a 10-year draw period, where the borrower can withdraw funds from the line of credit.

After that draw period, the balance has to be repaid, and that is usually over a 10-15 year period.

This is usually available to homeowners who have adequate income and do not have an excessively high debt-to-income ratio.

Pros and Cons of the Cash-Out Refinance

The Cash-Out Refinance is the best option for homeowners that want to keep their loan simple, as it keeps everything all under one umbrella.  However, it’s best to take out that loan for a defined purpose, rather than just trying to get cash in hand.

The cash out volume is usually kept to 80% of the home’s value, keeping borrowers away from PMI (Private Mortgage Insurance).

With rates as low as they are, a Cash-Out Refinance is a great way to use the equity available in the home.  However, when rates rise, this isn’t as valuable of a product.

Keep an eye on the rates as they rise and fall, and strike when the rate will drop to kill two birds with one stone, lowering the interest rate and taking out cash.

Pros and Cons of a HELOC

A HELOC also offers some upside, if borrowers are happy with their current loan.  It basically adds on a line of credit that borrowers can use as they see fit. 

The downsides are the adjustable rate and the ease of access.  The adjustable rate can really come back to bite borrowers when rates rise.  The ease of access can do the same.  When borrowers treat a HELOC like a credit card, it can really cause serious issues down the road when it’s time to pay it back.

Is a Cash-Out Refinance Better then an HELOC?

It depends on circumstances, but right now, with interest rates at or near all-time lows and tappable equity skyrocketing as home values increase, there’s never been a better time to take cash out of your home with a Cash-Out Refinance. 

As a bonus, whenever a borrower takes out a Cash-Out Refinance with us, they can skip the next two months of payments.

Call The Home Loan Expert Team in St. Louis at (314) 781-9700, Chicago at (773) 770-4727, Indianapolis at (317) 550-1515, and Nashville at (615) 810-8555.  You can always apply online with our 5-Minute Loan Approval at hero.loan for your VA Loan, and www.thehomeloanexpert.com for your other mortgage needs, and we’re also open on Saturdays and will come to you to help close your loan. We work hard to make it easy on you.  Nobody gets lower rates on better loans than The Home Loan Expert, Ryan Kelley, why go anywhere else?

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