Accessing the equity that you’ve built in your home can be a great and affordable option for achieving some of your financial goals. Whether you are interested in consolidating debt, funding education, or making home improvements, the cash value that you’ve accumulated can meet all of these needs. There are two ways to tap into your home’s equity. While both of them have their unique attributes and benefits, they can also have their limitations and differences. Let’s take a closer look at how a home equity line of credit compares to a cash-out refinance.
What is a Home Equity Line of Credit?
A HELOC (home equity line of credit) is a second mortgage allowing you to access money against the equity in your home. Similar to a credit card you are able to use these funds as needed.
As a second mortgage, you need to be aware that you’ll be adding another obligation against your property. This means that you’ll have an additional monthly mortgage payment to consider. These payments are divided into two separate periods, one for borrowing or drawing against, and a second for repayment.
The first period, known as the draw period is the timeframe that your credit line is available for use. During this time, you’re able to borrow money against your line and make minimum or interest-only payments on what you’ve accessed. When the draw period ends, you will no longer be able to access the line of credit. Furthermore, you will be required to begin making full monthly payments that include the principal balance as well as interest. This second period is called the repayment period. The lengths of these periods depend on the type of line you get
Standard Mortgage (NMLS#: 44912) does not offer home equity lines of credit.
What is a Cash-Out Refinance?
A cash-out refinance is a type of mortgage refinancing that allows you to take on a larger mortgage in exchange for accessing the equity in your home. By refinancing at a higher balance than your existing mortgage, you can receive a check for the difference, as your original mortgage will be paid off.
A cash-out refinance requires many of the things that any mortgage requires. A quality credit score, income, and a healthy debt-to-income ratio will be required by your lender. They will also assess how much equity is in your home, and how much cash you’ll be able to acquire through a refinance.
What are the Main Differences Between a Cash-Out Refinance and a HELOC?
There are a few distinct differences between a cash-out refinance and a home equity line of credit. The first is that a HELOC is a second mortgage, while a cash-out refinance is a new mortgage with a higher balance. A cash-out provides you with a lump sum cash payment, while a HELOC allows you to access the cash as you need it during the draw period. You can also do a cash-out refinance with a fixed interest rate, so you won’t have to worry about your monthly payments increasing. Some HELOCs have variable interest rates, and others only carry interest for a few years, which can make it difficult for borrowers to amortize that debt.
While Standard Mortgage (NMLS#:44912) doesn’t offer home equity lines of credit products, it is important to know the differences between these equity accessing options. The right lender can help you determine which strategy is best for you. For over 90 years the expert staff at Standard Mortgage has been helping home buyers and homeowners with their refinancing and purchasing needs.
