When you need extra money, one of the first things you might think about is using the value in your home. Maybe you want to renovate your kitchen, pay off high-interest debt, or cover college tuition. Whatever the reason, tapping into your home’s equity can give you the cash you need. But deciding how to do that is where many homeowners get stuck.
Two common options are a HELOC and a cash-out refinance. They both let you borrow money using your home’s value, but they work in different ways. If you’re not sure which one to choose, don’t worry. This guide will help you understand how they work so you can make the right decision for your situation.
Understanding HELOC vs Cash-Out Refinance
Let’s start by looking at what each of these options means. A HELOC, or Home Equity Line of Credit, works a lot like a credit card. The bank gives you a line of credit based on how much equity you have in your home. You can borrow from it when you need to and only pay interest on the amount you use. Most HELOCs have variable interest rates, so your payments can go up or down over time.
On the other hand, a cash-out refinance is a new mortgage. You replace your current home loan with a bigger one, and the bank gives you the difference in cash. You then make monthly payments on the new loan, usually with a fixed interest rate.
When comparing HELOC vs cash-out refinance, think about how you plan to use the money. If you need access to cash over time—like for ongoing home improvement projects—a HELOC might make more sense.
But if you want one lump sum and like the idea of a stable payment, a cash-out refinance from Amerisave could be the better choice.
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When a HELOC Might Be the Better Option
A HELOC gives you flexibility. Let’s say your home is worth $300,000, and you owe $200,000 on your mortgage. That gives you $100,000 in equity. Your lender might offer you a HELOC for $50,000. You don’t have to use it all at once, and you can borrow only what you need when you need it.
This can be helpful if you’re not sure exactly how much money you’ll need or if your expenses will come in stages. You’ll usually have a draw period—often 10 years—where you can borrow and repay as needed. After that, you’ll start paying back the loan in full. Because you only pay interest on the money you use, it can be more affordable than other loans if managed carefully.
When a Cash-Out Refinance Might Make More Sense
Now imagine you’d rather lock in a low interest rate and get a set amount of money up front. Maybe you want to pay off all your credit card debt or fully fund your child’s college tuition. A cash-out refinance can help with that. It replaces your current mortgage, but your new loan is higher—so you get the difference in cash.
Let’s use the same numbers: your home is worth $300,000, and you owe $200,000. If you refinance and get a new mortgage for $250,000, you’ll receive $50,000 in cash. You’ll pay back the $250,000 with a new monthly payment and possibly a new term—like restarting a 30-year loan. For some people, this can lead to lower interest rates compared to a HELOC, especially if rates are low when you refinance.
