Cash-Out Refinances vs. Home Equity Line of Credit

If you are considering using your home’s equity to pay against debt or to make large purchases, you have a few options. Two of the most common choices are a Cash-out Refinance Loan or Home Equity Line Of Credit, also known as a HELOC. What’s the difference? We have broken down the pros and cons for each to help you decide which is best for your needs.

Cash-out Refinance Loan

What is it?

A Cash-out Refinance Loan replaces your existing mortgage with a new home loan for more than you owe. You receive the difference in cash, or use it to pay off other debts (including your current HELOC). This differs from a traditional refinance loan where you would take out a new loan for the same amount as you owe.

Advantages:

Typically, interest rates for cash-out loans are lower than credit cards and have fixed rates, making it a good option for large purchases. Interest on Cash-out Refinance Loans is tax deductible* and can offer borrowers big savings come tax season.

Things to consider:

Cash-out Refinance Loans are to mortgage loans, meaning you will be subject to new terms and additional fees, such as closing costs. Should your home’s value decrease, you may be at risk of owing more than your home is worth.

Home Equity Line of Credit

What is it?

A HELOC is a loan that is taken out, in addition to your mortgage, that uses your home as collateral. Once you are approved for a HELOC, it works similar to a credit card line and you can borrow the money as you need it simply by writing a check.

Advantages:

Since you can withdraw money as you need it and only pay interest on the amount you use, a HELOC is a good option for those looking for flexibility. When used correctly, opening a HELOC may positively affect your credit score over time.

Things to consider:

Like credit cards, you must be disciplined when withdrawing money and making payments. Overspending may make it difficult to pay the debt back in addition to your mortgage. The terms and conditions on a HELOC can vary by lender. If your HELOC comes with variable interest rates, your rates may increase from payment to payment. With the passage of the new tax bill, HELOC interest is no longer tax-deductible.*

Deciding the best option

Cash-out Refinance Loans and HELOCs are great financing tools for disciplined borrowers looking to take advantage of their home’s value, and put it towards long-term purposes like home renovations or to pay off debts. For more guidance on which option will work best for you, contact a First Federal Bank mortgage lender.

*Consult a tax professional.

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