Cash Out Refinance vs Home Equity Line of Credit (HELOC)
In many cases, accessing home equity offers an option for accomplishing more of your financial goals. There are options for tapping into your home's equity, like a cash out refinance or a Home Equity Line of Credit to help you do so, and there are some differences between the two.
Cash Out Refinance Overview
Cash Out Refinance vs HELOC
A Cash Out refinance is a way of tapping into the equity you have built up in your home through your monthly payments and as it has increased in value. It involves retiring your current mortgage by taking out a new one, possibly with different terms, and for an amount that is larger than what you currently owe. The excess over your old loan’s outstanding balance and the new one is then paid out to you in cash at closing.
Using a Home Equity Line of Credit (HELOC) gives a borrower access to a line of credit based on the available equity in a home and functions somewhat like a revolving credit card. It requires a 2nd monthly payment and features an adjustable interest rate. That means if interest rates go up, your monthly payment could also increase.
A Cash Out refinance can have a fixed interest rate, so you could have one payment amount that stays the same over the life of the loan. With a HELOC you have a 2nd mortgage, and with a cash out refinance, you have one mortgage and one low monthly payment.
Cash Out Refinance Benefits
Why Cash Out refinance?
If you've been thinking about getting a HELOC, consider a Cash Out refinance to access your home equity. You may want to use some of the money invested in your home to eliminate other debts, like credit card balances or to contribute to your children’s college tuition bills. Perhaps you’re looking to self-finance home improvement expenses or pay medical bills. You may even prefer to use it to fund vacation homes, a rental property, or start a business.
A Cash Out refinance could help you:
- Access a large lump sum of cash
- Pay off high interest credit card debt
- Pay off a car loan
- Pay student loans
- Pay off medical bills
- Finance a wedding
- Take a vacation
- Make home improvements
- Pay for elderly care
- Buy an investment property
- Pay for college
- Pay down debt and improve your debt-to-income ratio
- Boost your credit score
- Get a lower interest rate
- Improve your financial situation
- Get potential tax deductions (be sure to consult a tax professional)
- Have simple interest instead of compound credit card interest
Cash Out Refinance Requirements
What is needed for a Cash Out refinance?
In general, you'll need to meet minimum FICO requirements for the new loan and you'll need to have enough equity in your home for the refinance. An appraisal of your home may also be required.
If your home is worth $250,000 and you owe $150,000, then you have $100,000 in equity built up in your home. You could tap into that equity to cover any expenses you want. For example, if you owe $80,000 in credit card debt at a 15% APR, you could pull out $80,000 from your home’s equity and pay off higher-interest debt.
Cash Out Refinance Loan Options
What loan types are eligible for Cash Out refinance?
Including Conventional, Jumbo, FHA, VA, and Home Equity Lines of Credit - check with a Loan Specialist for your personal consultation.
The FHA 203k renovation loan, or Home Improvement loan, is designed for borrowers who are interested in financing home improvement, and it can be used for both purchase and refinance. A Home Improvement loan is a type of Cash Out refinance that allows you to use your home's equity to finance improvements or modifications to your home like:
- Removal of lead-based paint
- Decks, patios, porches
- HVAC systems (heading and air conditioning)
- Basement completion
- Basement waterproofing
- Updates to a septic or well system
- New kitchen appliances
- Washer and dryer upgrades
- Roofs, gutters, and downspouts
- Plumbing and electrical upgrades
- Minor kitchen or bathroom remodeling
- Installing carpet, tile, or wood flooring
- Restoring windows or doors
- Weather stripping and insulation upgrades
- Disability improvements
- Energy efficient upgrades
- New siding
- Building a home addition
Special Benefit for Veterans
Cash Out refinancing can be especially attractive to homeowners who qualify for VA-backed loans. The VA will guarantee these loans up to 100 percent of the home’s value. With the VA standing behind the loan, the lender can typically offer more favorable terms. This type of loan can also be used to refinance a non-VA loan into a VA loan. Another benefit: VA loans are not subject to down payment limits or private mortgage insurance (PMI). You can check to see if you qualify for a Certificate of Eligibility here.
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3. You could get cash within days 3 days of loan funding