Whether you’re looking into debt consolidation, home renovations, emergency funds, or tuition costs, you can count on your home’s equity to help you financially cover anything thrown your way. But when it comes down to (HELOC) home equity line of credit or (COR) cash-out refi, which would be your best option?
Let’s discuss the difference between a home equity line of credit and a cash-out refinance.
What Is Cash-Out Refinance?
Cash-out refinance is when you tap into your home’s equity to receive a lump sum or, better said, “cash in hand,” and you may qualify for a COR if you’ve had your mortgage long enough to have built equity in your home which allows you to pull out cash from the equity. You’re more likely to get more money if the value of your property has increased since your purchase. Things that could up your property’s value could include bathroom remodels, adding a pool, full kitchen remodel, etc.
How Is a Cash-Out Refinance Calculated?
If you bought your home for $350,000 and believe it’s now worth $400,00 and you’ve paid off $250,000 on your mortgage, you would subtract that from the value of your home, which would mean you have $150,000 in equity. You wouldn’t get the total $150,000 in cash, but you could get a high percentage of that once you’ve put some towards your refinance and closing costs.
What Are Some Things I Should Know Before I Consider a Cash-Out Refinance?
If you’re considering a cash-out refinance, here are some things to consider and research.
- How much equity is in your home?
Subtract the amount you still owe on your mortgage from the current market value of your home.
- What’s your credit score?
In most cases, lenders will require that you have at least a 620 credit score, lenders requirements will vary depending on unit type and how much cash you’re looking to borrow.
- What’s your current DTI score ( Debt To Income Ratio)?
Debt-to-income (DTI) ratio is the percentage of your gross monthly income used to pay your monthly debt and determines your borrowing risk. You can find out your DTI by adding up your monthly bills, which may include: Monthly rent or house payments; divide the total by your gross monthly income, which is your income before taxes. The lower your DTI, the better.
Pros of Cash-Out Refinancing
- Interest rates could be lower than other options like HELOC.
- You can use the cash from a cash-out refinance for anything you want, like home renovations, debt consolidation, and college tuition.
- Interest from your initial mortgage could be tax-deductible.
- There are many types of loans available with this process.
Cons of Cash Out Refinancing
- With a cash-out refinance, you’ll be required to pay on your mortgage longer.
- You could end up paying more in interest or have to pay higher monthly payments.
- You may have to cover closing costs associated with refinancing, which could be between 3% and 6%.
What Is a Home Equity Line of Credit (HELOC)?
A home equity line of credit (HELOC) is an additional line of credit secured by the property that gives you a revolving credit line to use for significant expenses or to consolidate higher-interest rate debt on other loans such as credit cards. A HELOC often has a lower interest rate than standard loans, and the interest may be tax deductible. A HELOC is similar to a second mortgage.
Cash-out refinance and a home equity line of credit is similar because you can use a HELOC and cash-out refinance to help you pay for debt consolidation, home renovations, large purchases such as appliances for your home, cars, boats, and any other expenses you may need at the time. But with a HELOC, you won’t get the lump; instead, it works like a credit card and can be used and paid back in monthly installments.
How Do I Calculate a HELOC Payment?
To calculate a home equity line of credit (HELOC), multiply the current HELOC rate by the annual interest rate charged to the loan, then divide the value by 12 (monthly) to determine how much you will owe monthly. This payment will vary depending on how much you qualify for. As you withdraw money from your HELOC, you'll receive monthly statements with minimum payments, including the principal and interest.
What Are Some Things I Should Know Before I Consider a Home Equity Line of Credit (HELOC)?
- How much equity is in your home?
Subtract the amount you still owe on your mortgage from the current market value of your home. You must have at least 15% in equity to qualify.
- What’s your credit score?
In most cases, HELOC lenders will require that you have at least a 620 credit score; HELOC lender requirements will vary but will allow you to borrow up to 85% of the value of your home, which is more than what you would get for a cash-out refinance.
- What’s your current DTI score (Debt To Income Ratio)?
HELOC lenders require that you have a debt-to-income ratio of less than 40%
Pros of a Home Equity Line of Credit (HELOC)
- With HELOC, you’ll be able to borrow up to 85% of your equity versus only 80% with a cash-out refinance.
- The closing cost for a HELOC will be lower than a cash-out refinance.
- You could qualify for a tax break with HELOC.
- If you’ve already locked in a reasonable interest rate, a HELOC will allow you to keep that current rate and still qualify for room to get cash.
Cons of a Home Equity Line of Credit (HELOC)
- HELOC interest rates could be higher than they would be to refinance your home.
- HELOC would come with a much shorter term, say 5-10, versus a 15 or 30-year fixed mortgage.
- HELOC is similar to a second mortgage, so you will be required to make two separate monthly payments, one for your original mortgage for your property and the other for the HELOC.
- Payments with a HELOC could vary.
Now That You’ve Seen Your Options, Which Should You Choose?
Now that we’ve covered all the necessary facts and the pros and cons of each option, you should know which option you prefer and what your current financial situation looks like. Before you take steps to stand firm in choosing cash-out refinancing or a home equity line of credit, be sure to factor in potential interest rates, what your monthly payment could look like, tax breaks, closing costs, etc. Whether you prefer a lump sum or revolving payments, you can meet with someone from our mortgage team and get a clear understanding of your options.
- Decide whether a home equity line of credit- HELOC or a cash-out refinance COR- suits your financial situation better.
- Choose between getting a lump sum of cash or having the opportunity to pay in monthly installments.
- Lendgo can help you compare side-by-side options and rates from hundreds of lenders in your area