HELOC vs. Cash-out refinance
Both a cash out refinance and a HELOC are two ways for homeowners to borrow at low interest rates. But one can be better than the other based on current market rates and what the rate of your mortgage is.
With a cash out refinance, you're essentially taking out a new loan and using some of that money to pay off your old mortgage. This can be beneficial if interest rates have dropped since you got your original mortgage. However, if rates have gone up, it might not make sense to refinance.
With a HELOC, or home equity line of credit, you're taking out a loan against the equity in your home. This can be beneficial if you have a first mortgage at a lower interest rate than what's currently available in the market, then it usually makes more sense to do HELOC. This is because with a HELOC, you're only paying interest on the amount of money you actually use, rather than the entire loan amount. And there are high lender fees associated with taking out a cash out refinance.
Cash out refinances are best in declining rate environments. HELOCs are best when rates are on the rise. And if you have a lower interest rate on your first mortgage, it usually makes more sense to do a HELOC.
Doing either of these can be beneficial for homeowners who want to save money or tap into their home equity. But understanding the difference between the two is key.
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