Deciding Between A HELOC Or A Cash-Out Refinance

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As a homeowner, one of your most valuable assets is the equity in your home. And if like many of us, you’re probably feeling the changes in our economy, or looking to get out of high-interest debt. Regardless of what your financial goals may be, knowing which direction to take when tapping into your home’s equity can help you make a more informed decision that’s right for your goals.

Cash-Out Refinance

One common way to tap into the equity in your home is by refinancing your existing mortgage. This can be particularly helpful, especially if you’re still within the terms of your original loan.

With a “cash-out” refinance, not only will you gain access to the available equity in your home, you can potentially take advantage of a better interest rate or even eliminate any payment mortgage insurances applicable to your loan.

While cashing in on your home equity with a refinance yields many benefits, one potential drawback is the one-time payment of this option. If your goal includes wanting the flexibility of accessing your funds at your own pace or only when you need them most, a refinance may not be your the best option.

Home Equity Line Of Credit

Another approach to tapping into the value that’s build up in your property is through a home equity line of credit, commonly known as HELOC. Similar to a cash-out refinance,  a HELOC gives you access to cash when you need it. Unlike a refinance, however, establishing a line of credit is a separate loan product that offers flexible repayment options.

Because a HELOC is a revolving loan, your monthly payments may vary depending on current rates and how much of the loan funds you’ve used. If having a set predictable monthly payment is important to you and your spending plan, establishing a HELOC may not suit your needs.

Differences Between The Two Options

Now that we’ve established a few “pros” and “cons” to each option, here are a few key differences to consider when it comes to a cash-out refinance or a home equity line of credit.

Length of the Loan

One important difference you will find between a refinance and a HELOC is the life (or term) of your loan. With a refinance, you are taking your existing mortgage and refreshing your loan terms with your new financed amount as a new loan.

The terms can range between a 15, 20, or 30-year mortgage. When it comes to a HELOC, since you are establishing a new and separate line of credit, your loan term is locked in, typically between 15 and 20 years.


Once you’ve established which loan term is right for you, the next consideration is how the repayment process functions. With a refinance, your monthly payments are composed of both your principal and interest, as well as any escrow (taxes, insurance, etc.).

With a HELOC, your loan is broken down into two periods – draw and repayment. During your “draw” period, your monthly payments are typically interest-only with the option to pay the principal. Like a credit card, your monthly payments go back into your available balance to be reused while your draw period is open.

Once your draw period is over, you will then enter the repayment period of your loan. During this time, your monthly payment will include both principal and interest; however, you will no longer have access to reuse any repaid funds.

Closing Costs

Finally, the last key difference to mention when it comes to HELOCs and refinancing is the potential closing costs. While every situation is unique, closing costs can differ between each loan product. Typically with a refinance, closing costs are a bit more intensive as the closing requirements for a mortgage are more detailed.

With a HELOC, the cost of closing can be more flexible thus leaving the potential to save you more money. While predicting the exact costs to close will be case by case, speaking with a mortgage loan expert can help you navigate which option is best for you.

Trying to decide whether a cash-out refinance and a home equity line of credit makes the most sense for your situation can be overwhelming. Our knowledgeable mortgage team is here to help you navigate these options and find a solution that aligns with your financial goals.

Call us at 804-274-1200 or visit one of our convenient branch locations to speak with one of our lending specialists and get started today.

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