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HELOC vs. Cash-out refinance

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Jan 20, 2023

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How does a HELOC differ from a cash-out refinance, and which is better in this market environment?

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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Equal Housing Lender
Hitch, Inc. 23833672158 NW Toussaint Drive. Bend, Oregon 97703

1. Qualified applicants may borrow up to 95% of their home’s value. This does not apply to investment properties.2. HELOCs have a 10-year draw period. During the draw period, the borrower is required to make monthly minimum payments, which will equal the greater of (a) $100; or (b) the total of all accrued finance charges and other charges for the monthly billing cycle. During the draw period, the monthly minimum payments may not reduce the outstanding principal balance. During the repayment period, the borrower is required to make monthly minimum payments, which will equal the greater of (a) $100; or (b) 1/240th of the outstanding balance at the end of the draw period, plus all accrued finance charges and other fees, charges, and costs.The lender will calculate this amount by taking the outstanding Account Balance on the last day of the draw period and dividing it by 240 months and then adding any finance charge that accrues but remains unpaid during the monthly billing cycle plus any other fees, charges and costs to the fixed principal payment that is due. During the repayment period, the monthly minimum payments may not, to the extent permitted by law, fully repay the principal balance outstanding on the HELOC. At the end of the repayment period, the borrower must pay any remaining outstanding balance in one full payment.3. The time it takes to get cash is measured from the time the Lending Partner receives all documents requested from the applicant and assumes the applicant’s stated income, property and title information provided in the loan application matches the requested documents and any supporting information. Most borrowers get their cash on average in 21 days. The time period calculation to get cash is based on the first 4 months of 2024 loan funding's, assumes the funds are wired, excludes weekends, and excludes the government-mandated disclosure waiting period. The amount of time it takes to get cash will vary depending on the applicant’s respective financial circumstances and the Lending Partner’s current volume of applications. Closing costs can vary from 3.0 - 5.0%. An appraisal may be required to be completed on the property in some instances.4. Not all borrowers will meet the requirements necessary to qualify. Rates and terms are subject to change based on market conditions and borrower eligibility. This offer is subject to verification of borrower qualifications, property evaluations, income verification and credit approval. This is not a commitment to lend.5. The content provided is presented for information purposes only. This is not a The content provided is presented for information purposes only. This is not a commitment to lend or extend credit. Information and/or dates are subject to change without notice. All loans are subject to credit approval. Other restrictions may apply.