Cash-Out Refinance vs HELOC: What’s the Better Option?

For homeowners, the equity they’ve built up in their homes is a valuable source of funds that can be used to achieve a range of financial goals. 

There are two primary ways to access that equity: a cash-out refinance and a home equity line of credit (HELOC). 

Both options allow homeowners to borrow against the value of their homes, but they work in different ways and have different pros and cons. 

In this guide, we’ll explore the differences between a cash-out refinance and a HELOC, and offer practical guidance on how to choose the best option for your needs and goals. 

Whether you’re looking to renovate your home, pay off high-interest debt, or invest in a rental property, this guide will help you make an informed decision about accessing your home equity.

Related Reading: Second Home Mortgage Requirements

Reasons to consider a cash-out refinance or HELOC

When considering accessing home equity, homeowners often have a variety of goals in mind. Some common reasons for tapping into home equity include:

• Financing a home renovation
• Consolidating high-interest debt
• Investing in a rental property
• Covering unexpected expenses

How to figure out your home equity

To calculate your home equity, subtract your outstanding mortgage balance from your home’s current value. For instance, if your mortgage balance is $200,000 and your home is worth $400,000, your equity is 50% or $200,000.

The difference between a cash-out and a HELOC is how the equity is dispersed to the borrower. In a cash-out refinance, your equity payment is paid in a lump sum and you’ll have a new balance on your mortgage. With a HELOC, your equity is accessible to you via a line of credit that works like a credit card that you make payments on.

Why choose a cash-out refinance 

Cash-out refinancing typically has lower interest rates than HELOCs, which can save homeowners money over the life of the loan.

With a cash-out refinance, homeowners lock in a fixed interest rate, which can provide stability and predictability in their monthly mortgage payments.

The interest paid on a cash-out refinance may be tax-deductible, which can reduce the overall cost of the loan.

Cons of cash-out refinance 

• Higher fees, including closing costs, appraisal fees, and other fees
• Extends the repayment term of the mortgage, which means that homeowners may end up paying more in interest over time
• By taking on more debt through a cash-out refinance, homeowners may be putting themselves in a riskier financial situation.

Why get a HELOC

With a HELOC, homeowners can borrow only what they need, when they need it, and only pay interest on the amount borrowed.

HELOCs typically have lower upfront costs than cash-out refinancing, which can make them a more affordable option for some homeowners.

They typically have shorter repayment terms than cash-out refinancing, which can help homeowners pay off their debt faster.

Cons of HELOC

• Variable interest rates, which means that the interest rate can change over time and result in higher payments
• May have a balloon payment due at the end of the term, which can be difficult for some homeowners to repay
• If homeowners are unable to repay the loan, they may risk foreclosure on their home.

Cash-out refinance vs HELOC: What’s the better option?

When it comes to choosing between a cash-out refinance and a HELOC, there’s no one-size-fits-all answer. 

Homeowners should carefully consider their individual needs and goals, as well as their financial situation, to determine which option is the best fit. 

When deciding between a HELOC and a cash-out refinance, homeowners should consider the following factors.

Use of funds

With a cash-out refinance, homeowners receive a lump sum of cash that can be used for any purpose. On the other hand, a HELOC provides a line of credit that can be accessed as needed. So consider your goals and how you plan to use the funds before deciding between the two options.

Current interest rates

Interest rates can have a significant impact on the overall cost of the loan. It’s important for homeowners to compare the interest rates offered by different lenders for both cash-out refinancing and HELOCs. 

Generally, cash-out refinancing has lower interest rates, which can result in lower monthly payments and less overall interest paid over the life of the loan.

Home Equity

Consider the amount of equity you have in your home as this can determine which option will be available to you, as well as the amount of financing you can access. Lenders will have varying requirements as to how much equity they’ll allow you to access. 

Credit Score

Generally, lenders will require a higher credit score for cash-out refinancing than for HELOCs. Homeowners with a high credit score may be able to secure a lower interest rate and more favorable terms.

Financial Stability

As a homeowner, you should also consider your overall financial stability when deciding between a cash-out refinance and a HELOC. 

A cash-out refinance involves taking on more debt and extending the repayment term of the mortgage, which can impact a homeowner’s monthly budget and financial goals. 

On the other hand, a HELOC provides more flexibility in how you can use the funds and may be a better fit for homeowners with fluctuating income or unpredictable expenses.

Refinancing and HELOC FAQ

Whichever financing option you choose, it’s important to find an experienced and responsive lender that will be attentive and responsive to any questions you have. 

Do you lose equity when you refinance your home?

When you refinance your home, you don’t necessarily lose equity. Refinancing involves taking out a new mortgage, which pays off your existing mortgage and replaces it with a new one. 

The new mortgage may have a different interest rate, payment amount, and term than your old one, and the amount you owe on the new mortgage will include any fees or closing costs associated with the refinance.

If the new mortgage is for a larger amount than your old one, you may have less home equity after the refinance because you’ll owe more on the property. However, if the new mortgage is for the same amount or less than your old one, you won’t lose equity, but you may still have to pay closing costs and fees that can reduce your overall equity position.

Refinancing, however, can sometimes help you build equity in the long term. For example, if you refinance to a lower interest rate or a shorter loan term, you may be able to pay off your mortgage more quickly, which can help you build equity faster. 

Additionally, if you use the cash-out refinance option to make home improvements or pay off high-interest debt, those investments can increase your home’s value and help you build equity over time.

Learn how to get the best mortgage finance rates.

Do I have to pay taxes on a cash-out refinance?

In general, you don’t have to pay taxes on a cash-out refinance because the money you receive is considered a loan and not income. You don’t have to report them as income on your tax return.

However, there are some circumstances in which you may have to pay taxes on a cash-out refinance. For example, you may be subject to taxation if you use the funds for something other than home improvements or to purchase or improve a rental property. 

Are you ready to move forward?

If you’re a homeowner considering a cash-out refinance or a HELOC, talk to Homefinity for more information and help to decide which option is right for you. 

Our team of experts can provide the best rates and guidance through the refinancing or purchasing process. 

Contact us today to learn more.

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