Cash Out Refinance vs HELOCs: Which One is Best for You?

Especially when you’re strapped for cash, it can be difficult to tackle big expenses that are coming up around the bend—whether it’s medical expenses, helping your child pay for school, or making a past-due renovation to your home. Sometimes budgeting and saving accordingly doesn’t suffice (this is especially true if the big expense pops up unexpectedly). Luckily, at RMLEFCU, we have a few solutions:

A Home Equity Line of Credit (“HELOC”): A line of credit borrowed against the available equity of your home. Your home’s equity is the difference between the appraised value of your home and your current mortgage balance. However, instead of getting the cash all at once, you can borrow as needed during the draw period. Thus, you repay everything you borrowed (plus interest) during the repayment period. These usually come with an adjustable rate, so your monthly payments will vary.

A Cash-Out Refinance (“Cash-Out Refi”): A cash-out refinance replaces your original mortgage with an entirely new loan that’s greater than what you currently owe. The difference between the current loan amount and the new loan amount provides the “cash out.” And though rates for cash-out refinances are generally higher than for rate and term refinances, your interest rate will likely be lower than the rate you get for a HELOC.

But the real question is — which one is best for your situation? Let us break down some common scenarios so you can better understand your options.

For Homeowners Paying a High Mortgage Rate

Whether you need a “cash out” or not, a refinance is a very smart option to consider. However, if you managed to snag a particularly low interest rate, a HELOC may be a better solution.

For Members Who Need the Money ASAP

Since a proper Cash Out Refinance requires a full mortgage approval process (which can take some time), a HELOC may be the swifter and more effective option if you need cash as soon as possible.

For Large Expenses

Let’s say you need a $150,000 home addition, or you’re looking to renovate your entire home. Both are HUGE expenses, so we typically recommend a cash-out as opposed to a HELOC so you can stretch this expense out over the term of your payback.

For a Large Lump Sum

If you need a large lump sum up front, a cash-out refinance is your best bet. However, if the expense at hand is one that needs more of a spread-out repayment schedule (i.e. medical expenses or a long-term home improvement project), we’d recommend considering a HELOC instead since you’ll be able to draw on it whenever you need it. However, remember that closing costs with your new mortgage could outweigh a small cash out.

Our Certified Financial Counselors Can Help

At RMLEFCU, we have certified financial counselors on deck to help our members crunch the numbers regardless of the financial situation they find themselves in. Whether you have questions about our Cash Out Refinancing, are interested in pursuing a HELOC, or would like to speak with a representative about all your options, RMLEFCU is here to give you a helping hand. Reach out to us at 303.458.6660 or stop by any of our branches for more information.