Cash-Out Refinance vs. Home Equity Loan vs. HELOC: What’s the Difference???

If you listen to any radio station, watch television, or stream any online content you have probably seen or heard the quick ads encouraging you to consider debt consolidation using cash-out refinance or a home equity loan. If you have considered a home improvement project, you may also have heard about getting a HELOC. The similarity of all three options is that they are tied to your home’s equity, but what are the differences, and should you consider using one?

Here is some basic information for each:

A cash-out refinance uses your home’s equity for a cash payment made directly to you and it is done by replacing (paying off) your current mortgage with a new, larger mortgage that includes the amount of money you owed on the original mortgage plus the amount of equity you borrowed. The new larger mortgage will have a new interest rated and new payment terms. Depending on lenders, rates and your current credit score the new interest rate may be higher or lower than the original rate.

A home equity loan is also known as a “second mortgage” and like the cash-out refinance, is based on the difference between what is owed on your home versus the home’s current market value. It doesn’t replace your first mortgage but is in addition to the first mortgage for the amount of equity you borrow. It normally has a fixed interest rate which depending on current market numbers and your credit score could be higher or lower than your first mortgage.

A HELOC is similar to a home equity loan but instead of getting a check at closing for one lump sum, you apply for access to a specific amount based on your home’s equity and it acts as a revolving line of credit that you can draw on as needed (usually by using a debit card or checks), pay back, and then draw on again. Repayment terms and conditions are determined by your lender and interest rates are usually variable.

This is just a brief high-level comparison of these products as an educational starting point and there are many pros and cons to consider. The main advantage is the possibility of borrowing money for needed expenses or debt consolidation at interest rates generally lower than those offered by credit cards or personal loans. The main disadvantage of these products is that they are all tied to your home so you could risk losing your home if you default on payments just as you would if you missed payments on your primary mortgage. If you feel one of these products might benefit you financially, you should discuss all of your options with your lending institution or financial representative and shop around for some comparison terms and rates before signing on that dotted line!