Home Equity Loan vs. Home Equity Line of Credit vs. Cash-out Refinance

Home equity loans, a cash-out refinance and a home equity line of credit (HELOC) all use your home as collateral. So how do they compare when it comes to financing options? Here are a few key points to consider when deciding if one of these options is right for you.

With a home equity loan your funds are disbursed in one lump sum on the fourth business day after you close on your loan. You make equal monthly payments of principal and interest to pay the loan back.

A home equity loan is often referred to as a second mortgage, meaning that the home equity loan will be in a second lien position after the first mortgage that is already on the property. The benefits of a home equity loan include set repayment terms, including a fixed rate and allowing a higher budget for home improvements or home renovations.

The drawbacks of a home equity loan include the risk of owing more than your house is worth if the housing market retracts, being unable to relocate if you still owe a significant portion of your HE loan, and in extreme cases, needing to sell your house to cover the balance of your loan.

6 core criteria lenders consider when determining your loan include:

• Credit history
• Property value
• Debt to income ratio
• Available assets
• Your employment history
• Property type in question

These factors will often help a lender decide what to offer you in terms, amount and interest.

A home equity line of credit or HELOC is a bit more flexible in terms of accessing your funds. You can access your home equity line of credit as you need it. That means you can borrow many small increments, a few large increments or whatever suits your needs, as long as you have the funds available.

Each time you borrow from your line of credit, it's called a "draw". You draw funds by writing a check or using online banking. During the first 10 years that your line is open, you may draw on that line whenever you need to and you will make a monthly interest only payment on the portion of the line of credit you use. If a loan is in first lien or first position that means there are no other mortgages, loans or liens on the property or that the borrower will be paying off all existing mortgages or loans with this new loan that would move into the first position, plus or minus a margin.

With a HELOC you can repay the principal at any time during the draw period. You can continue to use available funds or repay the principal for the funds you have already used, so you can re-borrow it again with another draw during the draw period.

After the 10-year draw period, you will enter into the 15-year repayment period in which you will have a minimum monthly payment amount of both principal and interest to pay off the outstanding balance of your line of credit.

You can use a home equity line of credit to fund a number of large purchases, including:

• Home renovations and upgrades
• Invest in education such as college, private school and tutoring
• Finance a new car, or major appliance purchase
• Rainy day expenses or your dream vacation

There are numerous ways a home equity line of credit can be put to use, however, it’s important to weigh the value and fully understand the repayment terms before committing.

When you undergo a cash-out refinance, you are creating a new mortgage to replace your existing one. This new mortgage will be for more than your previous balance, and the difference is your “cash-out” part of the refinancing.

This type of refinance is extremely flexible, as you can spend your money as you see fit. However, it should be noted that if you do a cash-out refinance, your home lien is going to include that cash, which makes it easier to be “underwater” on your house (owing more than the property is worth) if you are not careful.

Cash-out refinancing is appealing because not only do you get a sizeable piece of spending money to use for any number of projects or purchases, but if the mortgage market is more competitive than when you got your initial mortgage, chances are you’ll have a lower mortgage payment and a lower interest rate as well.

Some of the things you can use a cash-out refinance for include:

• Repay a higher-interest loan or credit card
• Pay for a wedding or a dream vacation
• Settle emergency medical expenses or afford cosmetic medical procedures

Unlike a HELOC, cash-out refinancing gives you access to a portion of your mortgage in liquidity, allowing you the flexibility to spend as you see fit.

If you are taking on a renovation project, consolidating high-interest debt or you just want a worry-free getaway, a HELOC can help. And with Citizens FastLine, our digital HELOC experience, applying for and getting your money has never been faster and easier.

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