HELOC vs. cash-out refinance

This article is for educational purposes only. JPMorgan Chase Bank, N.A. does not currently offer Home Equity Lines of Credit (HELOCs) in all states. Please talk with a Home Lending Advisor to see if HELOCs are available in your state. Any information described in this article may vary by lender.

Quick insights

• Home Equity Line of Credit (HELOC) and cash-out refinancingrefinance-hl000061 are two options homeowners can utilize to access the wealth tied up in their home.
• HELOC is a flexible borrowing option that allows you to access your home’s equity as a revolving line of credit, similar to a credit card.
• Cash-out refinancing involves replacing your existing mortgage with a new, larger mortgage, giving you the chance to access the difference in cash.

When it comes to accessing equity tied up in your home, you have a couple of exciting avenues to explore: Home Equity Line of Credit (HELOC) and cash-out refinancing. Think of these options as two different keys that can unlock the treasure chest of your home’s equity. Each refinancingrefinance-hl000061 option offers unique advantages and features. Whether you’re dreaming of a lavish kitchen remodel, seeking to consolidate pesky debts or simply wanting to boost your cash flow, it’s vital to understand the ins and outs of these financial tools. Let’s dive into the world of HELOCs and cash-out refinancing and the importance of liaising with a home lending advisor to help you decide which option might be the best fit for your financial journey.

What is a HELOC?

A HELOC is a flexible borrowing option that lets you access the equity you’ve built in your property. Essentially, it’s a revolving line of credit secured by the home itself, allowing you to withdraw funds as needed, similar to a credit card. With a HELOC, you can borrow against your home’s value while still maintaining ownership. This can be an ideal option for individuals looking to finance large expenses without the hassle of a traditional loan.

How does a HELOC work?

• Draw period: Typically lasts 5 to 10 years, during which you can withdraw funds.
• Repayment phase: After the draw period, you start repaying both principal and interest.
• Variable interest rates: Payments can fluctuate based on market conditions, affecting your monthly expenses.
• Interest-only payments: During the draw period, many homeowners opt to pay only interest, keeping monthly payments lower.

While HELOCs can offer great flexibility for cash flow management and be a great resource for funding home improvement projects, it’s critical to consider the potential risks, such as rising interest rates and the impact on your overall financial stability.

What is a cash-out refinance?

A cash-out refinance is a financial strategy that allows you to replace your existing mortgage with a new, larger mortgage, giving you the opportunity to access the difference in cash. Fundamentally, this option lets you leverage your home’s equity to secure funds for various purposes – whether it’s for emergency expenses, home renovations, acquiring an investment property or other financial needs. By refinancing, you can capitalize on potentially lower interest rates while gaining access to cash in one straightforward transaction.

How does a cash-out refinance work?

Cash-out refinance terms, rates and eligibility may vary by lender. You should consult with a mortgage provider to understand specific requirements and options available to you. A cash-out refinance allows you to:

• Replace your existing mortgage: You are taking out a new mortgage that is larger than your remaining mortgage balance, effectively replacing it.
• Access cash: The difference between the new mortgage amount and the old balance is given to you as cash. For example, if your home is valued at $300,000 and you owe $200,000, you might refinance it for $240,000, receiving $40,000 in cash (which is 80% LTV). You typically receive the cash via a physical check or wire transfer (funds can be directly deposited into your bank account).
• Obtaining the refinance: The process typically involves applying for a new loan through a lender, similar to obtaining your original mortgage. This generally includes a credit check, income verification and an appraisal to determine your home’s current value.  
• Costs and fees: There are costs associated with refinancing, such as closing costs, which can include origination fees, appraisal fees and title insurance. These costs could potentially be rolled into the new loan amount depending on the lender.
• Fixed interest rates: Many cash-out refinances offer fixed interest rates, which can provide predictable monthly payments over the life of the loan. This stability could help you with long-term budgeting.

Take into account potential benefits and drawbacks. Potential benefits include lower rates, debt consolidation and immediate access to a lump sum of cash. Potential drawbacks include increased debt, the risk of foreclosure and closing costs.

Differences between HELOC vs cash-out refinance

A HELOC and cash-out refinance both have distinct advantages and drawbacks, making them suitable for individuals with various financial situations. It's a good idea to evaluate your needs for flexibility, access to funds and risk tolerance.

HELOCs:

• Interest rates and payment structures: HELOCs typically have variable interest rates with the option for interest-only payments during the draw period.
• Flexibility and accessibility of funds: HELOCs function as a revolving line of credit, allowing you to borrow and repay as needed.
• Impact on mortgage terms and taxes: HELOCs do not alter existing mortgage terms, and interest rates may be tax-deductible if used for home improvements.

Cash-out refinance:

• Interest rates and payment structures: Cash-out refinance generally offers fixed interest rates with immediate principal and interest payments.
• Flexibility and accessibility of funds: A cash-out refinance provides a lump sum at closing, lacking ongoing access to funds.
• Impact on mortgage terms and taxes: A cash-out refinance replaces the original mortgage, possibly changing your loan terms; interest deductions may apply. Please consult with a tax professional.

When should you refinance vs. get a HELOC?

Deciding between a HELOC and a cash-out refinance depends on numerous factors related to your personal financial goals, current mortgage terms and unique circumstances. Here's a breakdown of things to considers:

• Financial goals: Determine whether you need a lump sum of cash (refinance) or ongoing access to funds (HELOC).
• Interest rates: Compare current interest rates on your existing mortgage with potential new rates through refinancing or a HELOC.
• Credit score: Your credit score can impact the interest rates available to you. Higher scores typically lead to better terms.
• Current mortgage terms: Compare existing rates with potential new ones.

When to choose a HELOC: If you need short-term cash for immediate expenses or emergencies. It can be useful for home improvements over time and generally have lower closing costs.

When to choose a cash-out refinance: If you want to consolidate high-interest debt at a lower rate or secure a fixed rate which provides predictable payments and long-term stability.

In summary

Choosing between a HELOC and a cash-out refinance requires careful comparison of fees and terms from multiple loan providers. It's important to have a greater understanding of these costs to make a sound financial decision. Before deciding, gather information and compare alternatives to ensure you choose the best option for your financial goals. This approach can help you align your choice with your long-term objectives.