HELOC vs. Cash-Out Refinance: How To Decide Which Is Right For You
The most distinguishing characteristic of a Home Equity Line of Credit (HELOC) is that it is a line of credit. This allows borrowers to withdraw any amount up to the credit limit designated by the lender.
You’ll pay interest only on the amount you borrow, not on the full credit line. Interest is paid at a variable rate during a draw period of typically 10 years. When the draw period ends the interest rate may adjust to a fixed rate and monthly payments will include both principal and interest on the outstanding balance.
Cash-out refinancing is when a homeowner refinances their mortgage to a new mortgage (typically at a lower interest) and borrowing more than what is owed on the current mortgage. The first mortgage is paid off in this process and the homeowner gets a lump-sum payout of the extra cash amount at closing.
The interest paid will be on the entire new mortgage loan amount.
Credit Union of Southern California (CU SoCal) offers Home Equity Lines of Credit (HELOCs) and mortgage refinancing.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our mortgage options, home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all of your banking needs.
Read on to learn more about the difference between a cash-out refinance and a HELOC.
Get Started on Your Home Equity Line of Credit (HELOC)
What Is A Cash-Out Refinance?
A Cash-Out Refinance means borrowing more than what you owe on your current mortgage, paying off that loan, and getting a cash disbursement of the extra funds at closing. There are no restrictions on how the “cash-out” can be used.
With mortgage interest rates very low, refinancing your current mortgage to a new mortgage at a lower interest rate could help you lower your monthly payments. The cash-out amount is paid back as part of your monthly mortgage payment.
How To Qualify For A Cash-Out Refinance
Equity: Most lenders require 15-20% equity for a HELOC.
Credit Score: Lenders have different credit score requirements, but most will look for 660 or higher.
DTI Ratio: This is another factor that will vary based on the lender’s requirements, however, most lenders will accept a debt-to-income ratio between 35% and sometimes 50%.
Home Equity Line of Credit vs Refinance. Here’s How They Compare:
HELOC
Length Of Loan. HELOCs come with a 10-year draw period (the span of time during which you can withdraw money), and a payback period of up to 20 years.
Interest Rate. The HELOC starts with a variable rate that may be refinanced to a fixed rate during the repayment period. Some lenders may allow a rate conversion sooner.
Monthly Payments. Monthly payments during the draw period include interest-only. After the draw period ends, monthly payments will include interest (at a new rate) and principal toward principal to pay down the balance owed.
Closing Costs. Getting a HELOC doesn’t require a closing, therefore there are no closing costs charges.
Withdrawal Period. HELOCs come with a 10-year draw period during which the borrower can freely withdraw any amount of money, up to the line of credit limit.
Taxes. According to the IRS, the interest paid on a HELOC may be tax deductible if it is used to “buy, build or substantially improve the taxpayer’s home that secures the loan.”
Type Of Credit. A Home Equity Line of Credit (HELOC) is a type of “revolving” credit that is provided by a lender, has a credit limit, a variable interest rate, and is secured by the equity in a home. Check with a tax professional for more details on whether your refinanced mortgage interest is tax deductible.
Fees. Fees will vary by lender. Credit unions generally waive many fees or charge very little. For example, CU SoCal does not charge an appraisal fee or annual fee on a HELOC.
Cash-Out Refinance
Length Of Loan. The length of the mortgage loan is chosen by the borrower, and doesn’t affect the cash-out. Borrowers can choose a 10-, 15, 20, or 30-year mortgage.
Interest Rate. Because the cash-out is part of the new mortgage, there are no separate or unique rates charged on the funds. Therefore, the cash-out will be paid back at the same time as the regular monthly mortgage payments. If the borrower chooses an adjustable rate mortgage or a fixed rate mortgage, the interest paid will reflect the terms of the chosen loan type.
Monthly Payments. Monthly mortgage payments are required.
Closing Costs. Refinancing a home comes with closing costs, which can include: government recording costs, an appraisal fee, credit report fee, lender origination fees, lien search and title services, survey fees (if a new survey is needed), etc.
Withdrawal Period. In a cash-out refinance you will receive your money as a lump-sum payment at closing.
Taxes. According to the
IRS, “for you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.” Check with a tax professional for more details on whether your refinanced mortgage interest is tax deductible.
Type Of Credit. A mortgage refinance is a type of installment loan, because the loan is paid back in monthly installments.
Fees. Fees will vary by lender. Credit unions generally waive many fees or charge very little. For example, CU SoCal’s mortgage refinance has a low, flat lender fee, plus we offer a no-closing-cost option.
How To Choose Between A HELOC And A Cash-Out Refinance
There are pros and cons of HELOC vs. cash out refinance, and only you can decide which will best meet your financial needs.
Choosing between these options will often come down to how much money you need, whether you’re comfortable with an adjustable rate line of credit or a fixed-rate mortgage payment, and whether you prefer to have access to a line of credit over many years, or if you need a large lump sum of money.
A HELOC makes more sense if you need money for smaller purchase such as a wedding, college tuition, or home improvements. Because HELOCs start with a low variable interest rate, you may benefit from savings on interest. And, you’ll only pay interest on the amount you actually use. Some lenders charge an inactivity fee if you don’t use your HELOC funds, so be sure to understand the terms of the loan.
A cash-out refinance can be ideal for homeowners who are ready to refinance their mortgage anyway to take advantage of a lower interest rate. Getting cash-out at a fixed low rate can save you money in the long run. However, be aware that you’ll pay closing costs, which could from $5,000 to $10,000. And, you’ll pay interest on the entire loan amount for the life of the loan or until you refinance again or sell the home.
CU SoCal HELOC
CU SoCal offers an interest-only HELOC, so you pay only the interest due each month, giving you the flexibility to keep payments low during the 10-year draw period of your loan. We offer the choice of either a lump-sum loan or a revolving credit line that can be used over and over again.
Other great HELOC features include:
- Access up to 80% of your home's equity.
- No points.
- No appraisal fees for single unit loans.
- No annual fee.
- No closing costs.
- Loan limit up to $250,000.
Why Savvy Consumers Choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including HELOCs, car loans, personal loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our HELOC experts.
Apply for a HELOC today!
Get Started on Your Home Equity Line of Credit (HELOC)