HELOC or Cash-Out Refinance: Which Is Right for Me?

Home equity can be a useful tool for homeowners. It’s a relatively low-cost way to get more done: big projects, new investments, paying down high-interest debt, and even recapturing the cash you used for a down payment.

Your financing options often feature a lower rate than what you’d get with a personal loan and allow you to get a larger loan amount. But choosing which loan option is best for you can be confusing and leave you asking questions:

To help you evaluate your options, we’ve gathered explanations of two commonly available home equity solutions, along with scenarios of when each loan type may make financial sense.

Option 1: Home Equity Line of Credit (HELOC)

First up, we have the home equity line of credit, also commonly known as a HELOC.

What is a HELOC?

A HELOC is a line of credit that’s secured by (tied-to) your home. It’s like a credit card but typically comes with a much lower rate and a larger credit limit – often up to $250,000. You can draw from your approved limit to pay for projects or other large expenses as they come up. There is a set time to draw from the line of credit – usually 10 years.

During the time when you’re accessing cash, you’re only obligated to make interest-only payments, and you only pay interest on the money you use. Over the remaining term, you make interest-and-principal payments until you’ve paid the full balance. But you aren’t tied to a set payment schedule – you can do lump sum payments earlier on if you want to pay off the balance sooner.

Because a HELOC often features a variable rate, it’s good to view it as a shorter-term tool for managing cash flow or accessing capital. It’s not designed to hold an ongoing balance, as it can become expensive – especially during a volatile rate environment. This means it’s not a great option if you already have a tight monthly budget or anticipate having other growing costs.

When does a HELOC make sense?

Choosing a HELOC is a great option when you need a large sum of cash but plan to pay off the balance quickly. This way, you won’t be too impacted by rate changes.

Option 2: Cash-Out Refinance

The second option we’re exploring is the cash-out mortgage refinance.

What is a cash-out refinance?

With a cash-out refinance, you’re able to access home equity while refinancing your mortgage. This updates your rate, term, and loan amount.

You’ll have a new monthly payment and payoff date. But, depending on current rates and the length of your new loan, the new monthly payment may be similar to what you currently pay.

Of the two options, a cash-out refinance usually provides the lowest total monthly payment while accessing home equity. It also provides the most flexibility – especially if you choose Axos Bank as your lender – as we provide a cash-out option for most of our home loan programs.

If you’re worried about resetting your payoff timeline, you can explore a shorter term (15 years instead of 30) or pay extra toward your principal each month.

When does a cash-out refinance make sense?

A cash-out refinance is a great “long-haul” option. If you plan to access a significant amount of equity, rolling it into your monthly mortgage payment typically results in a lower payment than you’d get with a mortgage and HELOC.

Unlock Your Home Equity

Once you’ve reviewed your options, take these steps to unlock your home’s equity. First, get an estimation of your home’s worth. You can do it with our free home valuation tool. Next, gather your current mortgage details. You’ll need them when you apply for a loan.

Once you have everything gathered, reach out to our expert team for a free mortgage consultation. They’re available at 888-546-2634 to help you review your options to determine which scenario makes sense for you and your goals.

Need less than $30,000 to accomplish your goal? A personal loan may be a better choice. You can learn about personal loans here: When Does a Personal Loan Make Sense?

HELOC or Cash-Out Refinance: Which Is Right for Me?

This blog was published by Axos Bank on December 7, 2022, and last updated on December 7, 2022.