Home Equity Line of Credit vs. Refinance

One of the major perks of owning a home is having a chance to put your stamp on your space. In some cases, you can even add value to your property. Of course, to make these improvements you need cash. There are several ways to finance a big home improvement project. One is to refinance for cash, and another is to apply for a home equity loan or line of credit.

A standard Home Equity Loan is a fixed dollar amount that you borrow outright and is intended for big projects with a minimum amount of $10,000. The maximum you can borrow depends on how much equity you currently have in your home. Most lenders require you to maintain a 20% equity stake in your home. Depending on how much you wish to borrow, you would need an equity position of 30% or more before you could even apply for a home equity loan.

The second option is a Home Equity Line of Credit or HELOC. A HELOC allows you to withdraw small amounts of cash as needed from a fixed amount, paying interest only on the amount of money you’ve used.

What are the benefits of a cash out refinance or HELOC?

Better Rate: With either standard or HELOC you can expect to find a better interest rate than you would on a credit card or other unsecured personal loan.

Fixed or Adjustable: Standard Home Equity loans and HELOCs are both considered second mortgages and, as such, are available at either a fixed or adjustable rate.

Closing: Both of these types of loans generally do not have closing costs, but may have an application fee.

Interest: As both standard Home Equity loans and HELOCs are home mortgages they share one similar advantage: the interest on either may be tax deductible. (Check with your tax advisor to be sure.) If your project doesn’t require a large cash payment up front, the HELOC has the advantage since you are only charged interest on the amount you withdraw.

Foreclosure: Because these kinds of loans are considered a second mortgage they can be foreclosed on, should you default on your payments. In the event you do so, your primary mortgage would be paid from the proceeds of the sale of your home by the bank. Your Home Equity Loan or HELOC would be paid-off once the original mortgage paid.

There is a third option:

Depending on your equity position and the current interest rate on your home mortgage, a refinance can be an excellent option when it comes to paying for home improvements. Not only can you lower your monthly payments and take cash out, a refinance may even include consolidating high interest credit card debt and other outstanding personal loans, saving you additional money up front and over time.