Home Equity Loan Vs. HELOC Vs. Cash-Out Refinance

Your home is a vital asset, and it is something you can use to attain your financial goals, like paying for home enhancements or consolidating debts.

As a homeowner, you can tap into your home equity to get cash whenever. You get the funds by borrowing against the equity of your home, which is the difference between your home's current value and your mortgage balance.

Typically, you can seek home equity loans, home equity lines of credit (HELOC), and cash-out refinances to access your equity. These three methods are ways to turn your home’s value into cash.

Though these loans can accomplish similar results, they’re all different. For example, if you already have a mortgage, a cash-out refinance will substitute your mortgage with a new one—establishing its terms, monthly payment, and interest rate. Meanwhile, a HELOC or a home equity loan will be a second payment to make.

Financial institutions offer different ways to borrow against home equity. Here, qualifications vary. To qualify for any of these loans, you should have at least 15% home equity. Nevertheless, it all depends on the situation you find yourself in.

Here are some of the key differences among these three types of financing:

Home Equity Loans

Technically, a home equity loan is a second mortgage that allows you to borrow a lump sum that you then reimburse at a fixed rate. This loan doesn’t replace the mortgage you currently have, so you’ll make a payment on it in addition to your normal monthly mortgage payments. However, if your home is paid off, the home equity loan now becomes your primary mortgage.

Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) can be described as another home equity loan. But instead of getting a lump sum of money, you gain access to credit during the draw period. You can borrow what you need anytime. You then repay your loan plus interest during the reimbursement period.

HELOCs often come with an adjustable rate, and you only pay interest on the amount you borrow.

Cash-Out Refinance

Cash-out refinance substitutes your already existing mortgage with a completely new home loan that is greater than your current loan. The difference between the new loan amount and current loan amount provides the “cash-out.” To qualify for a cash-out refinance, you must have equity built up in your home. With a cash-out refinance, your interest rate could be lower than a HELOC or home equity loan rate.

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