Q. How do you know if you need a cash-out refinance or a home equity line of credit?
A. The pros and cons of choosing a home equity line of credit as opposed to a cash-out refinance can sometimes be confusing to borrowers. After weighing all of the available options the borrower needs to determine the best option for their situation and their own borrowing needs. Determining which type of equity loan is best depends on several factors. How much equity is available in the home? How much does the borrower need to borrow? When and how does the borrower plan to repay the money? Does the borrower want a fixed rate or a flexible term? And what interest rate does the borrower currently have on the first mortgage?
A home equity line of credit or HELOC is a credit line that is secured by the equity a borrower has in their home. Most lenders will lend 80 percent of their availability equity in the home. HELOCs usually have an adjustable rate. HELOCs have a specific “draw” period during which the borrower can access the funds. Draw periods typically range from 10- to 15-year terms. After the draw period ends, the loan typically rolls into a repayment period. During the repayment period the loan is amortized for the new term with a principal and interest payment. Some HELOCs are interest only, which means there will be a balance to repay at maturity because the monthly payments are never reducing principal. Others base their payments on amortization, meaning the payment amount is determined by the repayment term. This option allows the borrower to make principal reducing payments as well as the interest portion of the payment. Closing costs and fees are typically less on a HELOC than they would be on a cash-out refinance.
A cash-out refinance is an entirely new mortgage where the borrower pulls the available equity out of their home all at once instead of having access to the line of credit over time or on an as needed basis. If a borrower only wants to make one mortgage payment or wants a fixed rate loan, a cash-out refinance may be the best option. The cash-out option usually limits borrowers to 80 percent of the home’s value just like the HELOC. Fees on a cash-out refinance are typically higher than a HELOC.
Bottom line: borrowers need to speak to a lending professional to determine which option might be best for their specific need. At Insight Credit Union, we are here to help. Give us a call regarding your home lending needs.
Insight Credit Union offers:
Competitive interest rates
10-,15-, 20-, or 30-year fixed mortgages
Home equity lines of credit
407.426.6000 ext. 14500 // firstname.lastname@example.org
Insight Credit Union | NMLS # 414460
Views expressed are the current opinion of the author, but not necessarily those of Insight Credit Union. Mortgage rates are subject to change. Loans subject to normal underwriting guidelines. Actual rates will be customized based on the borrowers’ credit characteristics. Offers valid in the State of Florida only. Equal Housing Lender. Federally Insured by NCUA.