Looking to free up some equity in your home and wondering what the right option is? Many homeowners narrow the choices down to a HELOC vs. a cash-out refi but struggle to decide between these two options.  

In this article, we look at both, helping you to make the right decision for you. 



What Is a HELOC? 

A home equity line of credit, or HELOC, is a loan that allows homeowners to borrow against the equity they’ve built up in their homes. Equity is the portion of your home’s value that you own outright, and it can increase over time as you pay off your mortgage or as your home’s value goes up. Home equity loans allow you to borrow against your equity in two ways: as a line of credit that you may draw on as needed or as a lump-sum loan. 

You’ll only pay interest on the amount of credit that you use, making a HELOC an attractive option for financing home improvements or other unexpected expenses. And because your home equity serves as collateral for the loan, HELOCs usually come with lower interest rates than other types of loans. To qualify for a HELOC, you’ll need to have a good credit score and sufficient equity in your home. If you’re not sure whether a HELOC is right for you, talk to a financial advisor to get more information. 

What Is a Cash-Out Refinance? 

A cash-out refinance (also known as a cash-out refi) is a popular way to consolidate debt or get equity from your home. The process is simple: you take out a new loan that is larger than what you owe on your current mortgage and use the extra money to pay off other debts or make improvements to your home. The new loan pays off your mortgage, meaning that you are left with one monthly payment to make. Cash-out refinances are often a great way to save money on interest payments or free up cash for other purposes, but it’s important to understand how they work before taking out a new loan. 

A cash-out refinance typically has higher interest rates than a traditional mortgage, so it is crucial to compare rates and terms before choosing a lender. You also need to be sure that you have enough equity in your home to qualify for the new loan. Taking out a cash-out refinance can be a great way to consolidate debt or finance home improvements, but you need to make sure you understand the process before signing on the dotted line. 

Benefits of Each Option 

There are a few vital differences between a HELOC and a cash-out refinance, so make sure you do your research before deciding. A HELOC is a revolving line of credit that you can borrow against as needed for a finite period of time, usually 10 years. This makes it an ideal solution for ongoing expenses or projects that require periodic access to funding.  

On the other hand, a cash-out refinance is a one-time loan that allows you to tap into your home equity to get a lump sum of cash in hand. This can be useful for things like home renovations or paying off high-interest debt. 

Both HELOCs and cash-out refinances have their benefits and drawbacks. Here are a few things you should consider when deciding which is right for you: 

Benefits of a HELOC 
  • You can use it as needed so it’s ideal for ongoing or periodic expenses. 
  • The interest rate is usually lower than that of a credit card or personal loan. 
  • You can typically access up to 85 percent of your home’s value so it can be a good source of funding for large projects. 
Drawbacks of a HELOC 
  • The interest rate is variable so it might go up over time. 
  • You may be required to make interest-only payments for the first few years. 
  • If you don’t use the full amount of your credit line, you could end up paying more in interest over time. 
Benefits of a Cash-Out Refinance 
  • You can get a fixed interest rate so your payments will stay the same over time. 
  • You can use the money for anything so it’s a flexible source of funding. 
  • You might be able to get a lower interest rate than you would with a HELOC or personal loan. 
Drawbacks of a Cash-Out Refinance 
  • You could end up paying more in interest over time if you don’t use all the cash you borrow. 
  • You may need to pay for an appraisal and other fees up front. 
  • It may take a while for you to get approved for the loan and receive the cash so it’s not ideal for urgent expenses. 
When deciding which is right for you, you should consider your needs and financial situation. If you need access to cash on a regular basis, a HELOC might be the better option. If you have a specific expense that you need to finance, a cash-out refinance could be the way to go. 

Next Step for Getting Equity From Your Home 

Now that you know the difference between HELOC vs. cash-out refi, it’s time to determine which one is right for your unique financial situation. Both options offer potential benefits, so consider your needs and objectives before signing. 

Remember, mortgages are one of the biggest financial decisions that you are likely to make in your life, and you should not make any commitments without thinking things through clearly and thoroughly. 

If you need assistance understanding which of these options is best for you, contact the team of mortgage professionals at Solarity Credit Union today. Their home loan and refinance experts can answer your questions and help you navigate this complex process.