In this post, we’re going to answer the question of whether you should go with a cash-out refinance or a HELOC (a Home Equity Line of Credit). It really comes down to one word: circumstances. The circumstances really impact what the right option is. So, let’s look at a couple of scenarios.
Say you’ve been in a house for five years and you need $30,000 to redo your bathroom. You’ve got some equity in your home and you’re considering putting $30,000 on a credit card. So, do you use a HELOC to pay this off or should you do a cashout refi? Well, if you can get the HELOC paid off in a few months go with that, but if you’re not sure how you would afford that, we’d suggest going with the refinance. Since HELOCs have a variable interest rate, over an extended period of time it’s hard to predict what the interest will be.
Say you want to buy 20 acres in Idaho at a cost of $80,000. You just finished a loan two months ago. Do you do a cash-out refi or do you get a HELOC? Well, every loan has a seasoning period that you need to wait out before you can take out another loan. So, in this case, a HELOC would work well and then, if you aren’t able to pay off the HELOC in 12–18 months, you could always do a cashout refinance to pay off the debt.
Say you’re doing a massive remodel and you need $200,000. You have a very low mortgage, about $150,000. The home will be worth about $600,000 when you’re done doing the remodel. So, what’s the right call? You could do a HELOC, but then you’d have several lines of credit. You’d have your $150,000 (your first mortgage), a new $200,000 equity line, and the cash out for this situation. Because of this, just redoing the conventional loan into an account using a cash refinance would make a ton of sense and you’d be able to have a really low fixed rate for 30 years.
Say you don’t have a lot of equity in your home and you have a loan-to-value of around 70%. However, the pool is really expensive and going up to 80% wouldn’t get you enough cash. Because of this, we’d suggest you go with a HELOC because sometimes you can get up to a 90% loan to value. In general, HELOCs are better when you have a very pinpointed, limited purpose in mind.
If you’re just going on a trip to the store to pick up some ice cream you might just grab your bike, but if you’re going on a road trip you’ll definitely want to use a sedan. In a way, you can think of HELOCs as a bike and a cashout refinance as a sedan. HELOCs are better for short term, specific needs. The reason for this is that HELOCs have variable interest rates and it’s not possible to fully determine the total interest for the lifetime of this loan. If you’re not able to pay a HELOC back in, say, 6–18 months, it might be too much of a risk. With refinances you’re able to get fixed rates and you’ll be able to better plan for the long term.
You can also open up a HELOC and not use it. You can keep a zero balance and use it as an emergency fund if needed.
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Signature Home Loans LLC does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Signature Home Loans NMLS 1007154, NMLS #210917 and 1618695. Equal housing lender.BACK TO LIST