Keith Riley's Blog

Cash-Out Refinance vs. HELOC: Understanding Your Options

If you’re a homeowner looking to access extra cash, you may have come across two common options: a cash-out refinance and a home equity line of credit (HELOC). Both allow you access to your home’s equity, but they work differently. Knowing the differences can help you decide which one suits your needs.

What is a Cash-Out Refinance?

A Cash-Out Refinance replaces your existing mortgage with a new, larger loan. You receive the difference in cash, which can be used for:

• Home improvements
• Debt consolidation
• Major expenses (education, medical bills, etc.)

As this is a full refinance, your interest rate and loan terms may change.

What is a Home Equity Line of Credit (HELOC)?

A HELOC is a line of credit based on your home’s equity, similar to a credit card. You can borrow money as needed during the draw period (usually 5-10 years), and you only pay interest on what you use.

• After the draw period, you enter the repayment period (typically 10-20 years), where you pay both principal and interest.
• Interest rates are usually variable, meaning they can change over time.

Key Differences

While both options use your home’s equity, they function differently. A cash-out refinance replaces your mortgage with a new loan, providing a lump sum upfront. This is ideal for big, one-time expenses and typically offers a fixed interest rate, making payments predictable.

On the other hand, a HELOC acts as a separate line of credit, allowing you to borrow as needed over time. Instead of receiving a lump sum, you withdraw funds when necessary and only pay interest on what you use. HELOCs usually have variable interest rates, which means your payment amounts can change.

Pros of Each Option:

Cash-Out Refinance:

• Provides a lump sum for big expenses
• Typically has a fixed interest rate for predictable payments
• Can consolidate debt into one mortgage payments

HELOC:

• Flexible borrowing – take out money only when needed
• Pay interest only on what you use
• Can be used multiple times as you repay

Which Option is Right for You?

• If you need a large amount of money upfront and prefer a fixed rate, a cash-out refinance may be a good fit.
• If you want ongoing access to funds and flexibility, a HELOC could be a better choice.

Final Thoughts

Both options allow you to tap into your home’s equity, but the choice depends on your unique situation and financial goals. Consider interest rates, repayment terms, and how you plan to use the money. If you need help deciding which option would fit your needs, reach out today!