HELOC vs. Cash-Out Refinance: How to Choose?

What is a HELOC?

HELOC is a home equity line of credit, commonly known as a second mortgage. It is like a credit card, but your balance is a certain amount of home equity. You spend the cash however you want and pay it back through monthly payments. Many people who need small amounts of money choose this option.

What is a Cash-Out Refinance?

A cash-out refinance is a new mortgage for your current loan amount plus whatever equity you take out in cash. You pay back the cash-out through your new loan's monthly payment. When deciding if a cash-out refinance is a good idea, consider that the refinance extends the life of your loan, and you can use the cash for anything you need in life right now.

Similarities

When it comes to HELOC vs. cash-out refinancing, there are some similarities. Here’s what these equity choices have in common:

• You can spend the money however you would like—a renovation, tuition payments, investment opportunities, and more.
. There are no taxes on the money you receive because this isn’t income; it’s a loan.
• If you spend the money directly on significant home improvements (like windows, heat/AC upgrades, etc.), your monthly payment interest becomes tax-deductible.
• Both options have closing costs.

Differences

Every loan has its pros and cons. Here are some differences when it comes to choosing a HELOC vs. cash-out refinance:

HELOC

• HELOC is considered a second mortgage. Therefore, you pay a separate adjustable interest amount on what you take out.
• HELOC loans are suitable for the short term.
• HELOCs use your house as collateral and can be risky due to fluctuating interest rates and changing monthly payment dues.

Refinance

• A cash-out refinance takes your original mortgage and morphs it into a new 15-year or 30-year fixed interest rate loan amount. It’s like restarting your mortgage, potentially with more favorable terms.
• A cash-out typically has higher closing costs and monthly payments than a HELOC but a lower interest rate.
• A cash-out refinance is a good idea for long-term equity use.

Ask a Professional Cake Consultant

Start using your equity now by contacting Cake for a loan consultation. Cake's expert lenders can help you decide how to use your equity now. We will look at your situation and determine whether a HELOC vs. a cash-out refinance is best for your situation.