Homeowners sometimes need money for renovations, debt consolidation or other major expenses. Two common ways to borrow against home equity are cash-out refinancing and a home equity line of credit or HELOC. Each works differently and the right choice depends on your financial goals, your ability to manage a variable payment and how long you plan to stay in the home.
How a cash-out refinance works
A cash-out refinance replaces your current mortgage with a new, bigger loan. You use part of the new loan to pay off the old mortgage and receive the rest as cash. The result is one monthly mortgage payment.
Cash-out refinancing often comes with a fixed interest rate and a repayment term of 15 or 30 years. Closing costs can apply, and lenders often want the homeowner to keep some equity in the home after the refinance closes.
How a HELOC works
A HELOC is a flexible borrowing line secured by your home. During the draw period, you can access funds up to your credit limit as needed. In many cases, interest is charged only on the amount you use.
HELOCs often have variable interest rates. Many also have two stages: a draw period and a repayment period. During the repayment period, you begin paying back the amount you used and the monthly payment may change over time.
Comparing the two options before you decide
A cash-out refinance may make sense if you want to replace your current mortgage and get a predictable monthly payment. A HELOC may work better if you want to borrow in smaller amounts over time or if your expenses may change.
Before committing to either option, compare the interest rate, total fees, repayment terms and estimated monthly payment across multiple lenders. If you have questions about how either option affects your property or loan documents, a lawyer can help review the details.
