What is a HELOC?
A HELOC is a type of revolving loan that allows homeowners to take money out of their home’s equity. It can be comparable to a line of credit. This means you can take money out of your home’s equity (price of house - what you owe on your mortgage) and use the money for anything. For example, say your home is worth $150,000 and you owe $50,000 on your mortgage. This means you have $100,000 of home equity available. Lenders will have different qualifications, but generally we can qualify up to 90% of that amount. So in this scenario, you would be able to use up to $90,000.
You pay off a HELOC like you would your mortgage, you have monthly interest-only payments on the balance that can be paid down. Once the amount you have taken out is paid off you can take out money again. HELOCs can be used for a lot of different things, but we recommend paying off your high interest debts like credit cards first then using it for home improvement which can increase your home’s equity.
What is a Cash-Out Refinance?
Cash-Out Refinances replace your mortgage with an entirely new loan that is usually greater than what you originally owed. This is because you can pull out your home’s equity and then some for a higher interest rate. So say your home’s value is $200,000 and you're paying a $100,000 mortgage. Your home’s equity is $100,000, but you can get a cash-out refinance for say $150,000 which will replace your old mortgage amount, terms, and interest. When the refinance is closed you can then begin making payments and you will receive the $50,000. The difference between that new mortgage amount and the balance on your previous mortgage goes to you at closing in cash, which you can spend on home improvements, debt consolidation or other financial needs.
Ultimately, they are both great ways to utilize your home's equity for whatever your needs are. You can discuss with us which would be a more viable option for you personally. Give us a Call!