A Home Equity Line of Credit (HELOC ) is another form of home equity financing. You’re still you’re borrowing against the money already invested in your home, but instead of receiving a lump sum of money, you gain access to credit against your current equity. A HELOC is like a credit card in that you have a certain amount of money available to borrow and payback. You can take what you need when, or if, you need it. You only pay interest on the amount you borrow.
HELOCs often begin with a lower interest rate than home equity loans, including cash-out refinancing loans, but the rate is adjustable, which means it can increase or decrease according to designated benchmarks. Of course, this means your monthly payment may increase or decrease as well.
A cash-out refinance replaces your existing mortgage with a new home loan. You must have equity built up in your house to use a cash-out refinance.
Determining whether a HELOC or cash-out refinance is right for you is different for every individual, so it’s smart to compare your options to determine the right choice for you and your family.
Here are a few pros and cons for each method:
If you borrow more than 80% of your home’s value, you’ll have to pay for private mortgage insurance. For example, if your home is valued at $200,000 and you refinance for more than $160,000, you’ll probably have to pay PMI. Private mortgage insurance typically costs from 0.55% to 2.25% of your loan amount each year. PMI of 1% on a $180,000 mortgage would cost $1,800 per year.
Pros of a HELOC
Making the Right Choice
You’re probably starting to get an idea of which type of financing fits your situation. Both forms of refinancing can make sense if you can get a good interest rate on the new loan and have a sound use for the money.
Before deciding whether to apply for a HELOC or a cash-out refinance, consider how much money you really need and how you plan to use it. Factor in interest rates, fees, monthly payments, and tax advantages as you weigh your options.
Using the equity in your home wisely before selling can offer powerful financial benefits. Just be prudent and thorough in your decision making, and whenever possible, obtain advice and counsel from a professional in the mortgage industry.