HELOCs and Cash-Out Refinancing: What’s the Difference?

HELOCs and Cash-Out Refinancing: What’s the Difference? Both can help you gain access to some much needed cash, but both have their pros/cons

So, you’re looking to cash in on your home equity. If you’ve lived in your home for a while, using your equity can be an effective way to pay off other debts or buy big-ticket items.

That new car you’ve been eyeing for months? You could use a home equity line of credit (HELOC) to pay it off. Or maybe you want to remodel your home? You could utilize a cash-out refinance to cover the costs.

The options are endless. And the overall price of a HELOC or a cash-out refinance can be lower than using your credit card…

Sounds pretty good, right?

Well, it can be…

If you choose the right option for your financial situation.

HELOCs and cash-out refinancing are tools you need to be careful with—your home’s equity is on the line, after all.

So, if you’re not sure what the best option is for you, keep reading. We’ll explain the differences between a HELOC and a cash-out refinance, as well as the key differences between the two!

Understanding your Equity

Before we explain the options for tapping into your home’s equity, you’ll need to know how much equity you have in your home.

The factor your lender will be looking at is called your Loan-to-Value ratio (LTV). If your LTV is above 80%, your lender probably won’t offer you anything.

You can find your LTV by dividing your loan balance (the amount you still owe) by the appraised value of your home.
So, let’s say your home is worth $300,000 and you owe $75,000 to your lender.

$75,000 / $300,000 = .25 or 25%

That means you’d have 75% equity in your home.

In this scenario, you’d be in great shape—the lower your LTV ratio is, the better!

Keep in mind that you’d be able to borrow 85% of your home’s equity. So, if we subtract your loan balance from 85% of your home’s value ($255,000) we end up with the maximum amount you can borrow: $180,000.

Along with a loan-to-value ratio of less than 80%, your lender will ask that you meet a couple more requirements…

Generally, your lender won’t work with you if you have a credit score lower than 640.

And your debt-to-income ratio will need to be 43% or lower. You can find this number by adding up all of your debts and divide the total by your pre-tax monthly income.

What’s a HELOC?

A home equity line of credit, or , is a line of credit that you take out against your home.

Essentially, you’re using your home as collateral to take advantage of its equity.

Sounds kind of risky, right?

Well, like taking out any debt there’s some risk involved, especially if you spend beyond your means.

Still, a HELOC is a great way to withdraw a lot of cash when you need it, and it could cost you less than paying with your credit card…

Pros

• Low-Interest Rates: HELOC interest rates are typically a lot lower than credit card rates (around 4% compared to an average credit card rate of 16.22% as of September 2021).
• Tax-deductible: If you’re using your HELOC for home repairs/renovations, you may be able to write off your interest payments
• Lower overall interest payments: Unlike a cash-out refinance, you’ll only pay interest on the amount of money you withdraw
• No withdrawal fees: You won’t be charged for making withdrawals
• No closing costs: With a strong financial background, you may not have to pay for closing costs

Cons

• Draw and Repayment: In brief, all HELOCs have draw and repayment periods. Typically, you’ll have 10 years to draw, and then your repayment period will begin (5 - 10 years). So, you won’t have as much time to pay it back.
• Low payment problems: Many lenders offer minimum monthly payments or interest-only payments. But if you make minimum payments for your entire draw period, you could run out of time trying to pay it all back at the end of your repayment period.
• Payment Shock: Low payments can result in payment shock—the introduction of your loan principal could send your monthly payment skyrocketing in the blink of an eye.
• Adjustable Interest Rates: Most HELOCs are adjustable-rate loans, so your interest rate could go up (or down) at any time depending on market indexes.

Finally, like any debt, HELOCs can be a slippery slope if you don’t budget carefully. You’re free to use your money as you please, but it’s important not to get carried away, or you could risk losing your home.

What’s a Cash-Out Refinance?

A cash-out refinance works a little bit differently. Instead of taking a line of credit out on your current mortgage, you’re replacing your mortgage with a new one.

Just like a HELOC, you’ll need a solid chunk of equity built up before you consider refinancing…

Pros

• Lower interest rates than HELOCs: As of September 2021, Cash-out refinance rates are about 2.25 - 2.5%.
• Boosting your Credit: Using your cash-out refinance to pay off your credit cards and other debts could raise your credit score
• Fixed interest rates: Having a fixed-interest loan might be cheaper than a HELOC in the long run
• More time to pay: Unlike a HELOC, you’ll typically have a 15 or 30-year loan term to pay back your debt.

Cons

• Extended loan term: Because you’re getting a new loan, it’ll likely take you more time to pay it off (and you’ll probably pay more in interest)!
• Closing Costs: Just like your first mortgage, you’ll have to pay anywhere from 1.5 - 5% of your loan amount for closing costs.
• Not tax-deductible: There are limitations on what you can write off in your taxes.

Making the Right Choice…

Like we said—debt is a slippery slope. Whether you go with a HELOC or a cash-out refinance, you’ll need to keep your budget locked down tight.

And that brings us to our final con…

Both methods share a common problem: interest payments!

That little detail helps put thousands of your dollars in your lender’s pocket…

But does it have to be that way?

Well, yes and now. Interest isn’t going anywhere. But unnecessary interest? We can take care of that.

Why pay hundreds of thousands in unnecessary interest payments for your HELOC or mortgage refinance, just so the lender can make a buck?

We certainly see a problem with this model…

That’s why we invented the Money Max Account!

Ditching Debt & Building Wealth

We created the Money Max Account with a simple goal in mind:

To get you (the consumer) out of debt and out of your lender’s grasp in as little time as possible.

We’ve seen the effects of too much debt and too much interest—honest, hardworking people losing their livelihoods and possessions because they got stuck in debt.

And frankly, we’re sick of it. Your money should stay where it belongs. In your bank account, of course!

The results of our innovative solution speak for themselves…

$2 BILLION in mortgage payments and other debts saved by using the Money Max Account.

DECADES off of your mortgage payments. Using a strategic payoff system, Money Max can help you pay off your mortgage, student loans, car payments, RV payments, and any other debts you might have in as little as 7 - 10 years.

That’s a whole lot of time saved worrying about debt, and a whole lot of money building up in your bank account.

In just 7 - 10 years, you could be debt-free with the hundreds of thousands of dollars in interest payments you saved.

Before you know it, you could be creating the lifestyle you’ve always dreamed of, with the savings to do it comfortably…

Taking the first step is up to you.

So, If you’re ready to learn more about the Money Max Account and how exactly it can work for you, visit our website or give us a call now! Our financial representatives are standing by to help you get started.