HELOC vs Home Equity Loan vs Cash Out Refi: What is the difference?

Let’s start at the beginning…. 

What is Equity? When you own a home the difference between what you owe and the value of the  home is your equity. So, if you purchase a home for $200K and it’s valued at $250K you have $50K  of equity in your home.  

Why would you want to use the Equity in your home? This answer is different for everyone.  Maybe you need it for home improvements. Maybe you need it to pay off some debts. Maybe you  want to use it for downpayment on your next home without having to sell first to access those  funds. These are just some of the more common reasons someone would want to use the equity in  their home, but ultimately your equity is your money and you can use it for whatever you need. 

How do I access the Equity in my home? There are 4 ways to access the equity in your home.  

1. Sell your home 
2. HELOC (Home Equity Line of Credit) 
3. HELOAN (Home Equity Loan) 
4. Cashout Refinance 

Which of these options is best for you? This answer is also different for everyone, but here are  the pros and cons to each of these options.  

1. Sell your home 
2. Pros: You walk away with the most equity because you’re not limited by Loan to  Value Limits that come with HELOCs, HELOANs, and Refis.  
3. Cons: You had to sell your home 
4. HELOC (Home Equity Line of Credit) 
5. Pros: You can tap the equity in your current home without impacting your current  interest rate and mortgage payment. It’s also a Line of Credit, so you can take  money out and put it back during the draw period and you’re only making  

payments on the amount draw. This is a great option when you want access to the  equity, but you don’t necessarily need to use it all right away. Generally, you can  go higher on the Loan to Value than a HELOAN or Cashout Refi which get’s you  access to more of your equity. This is a great shorter-term option. 

1. Cons: The interest rate tends to be higher than a refinance rate and after the draw  period the loan enters the repayment period. Essentially, you’re gaining temporary  access to your equity (usually 3-10 years of a draw period) and once the draw  period is over you’re just making payments for the remainder of the HELOC term. To access more Equity you have to go through the process again. 
2. HELOAN (Home Equity Loan)
3. Pros: You can tap the equity in your current home without impacting your current  interest rate and mortgage payment. When you know you’re going to use the full  amount from the loan right away and you have a mortgage rate that’s significantly  lower, a HELOAN may be the best option for you to access your equity. This is a great longer-term option. 
4. Cons: The interest rate tends to be higher than a cashout refinance.  
5. Cashout Refinance 
6. Pros: Tends to be the lowest rate option to tap equity in your home.  
7. Cons: If you already have a low interest rate, a cashout refinance pays off your  current mortgage, so even though the interest rate on the Refinance might be  lower than a HELOC or HELOAN, you may end up paying more by doing a  

Cashout Refinance since you could lose your lower current mortgage rate 

5. Underutilized 5th Option: Creating Equity through a Renovation Loan Refi a. Pros: If you need to tap equity for home improvements, but there’s not enough  equity in your home to take out the money you need to make those improvements  you can do a Renovation Loan Refinance. The home value is then based off of the  improvements you’re planning on making and the funds are given directly to the  contractor upon completion of those renovations. 
6. Cons: Extra paperwork to get the contractor and bids approved 

So, which option is right for you? It really just depends on you, your home, your timeline, and  your needs. There is no right answer, just the right solution and that’s what I’m here to help  you find out. If you have any questions about how to tap and/or create equity in your home  don’t hesitate to reach out!

Kait Rissover

lo.primelending.com/kait.rissover

216-780-5099

kait.rissover@primelending.com