HELOC vs Refinance

If you refinance your current mortgage, you may be able to cash out some of your equity and save hundreds of dollars a year in monthly payments. Another option is a Home Equity Line of Credit (HELOC). If you are wondering which option may be a better choice, Bellco FCU can help!

Bellco FCU is a member-owned, not-for-profit federal credit union. Since 1938, when we were called the Bell Telephone Credit Union, we have provided unique financial products and services to individuals and small businesses in Berks County. 

Membership in Bellco FCU is open to people who live, work, worship, or attend school in Berks County, PA. Simply open a Member Savings account with as little as $5 and set up your membership in a few simple steps.

About Refinancing

There are two types of “refinance” – a rate and term refinance and a cash-out refinance. Since we are comparing options for turning the equity in your home into cash, we’ll discuss the cash-out refi here.

A cash-out refi is when you refinance your mortgage for more than you owe and take the difference in cash to spend on home improvements, debt consolidation or other financial needs.

Pros and cons of the cash-out refi: 

  • Pro: You will have only one mortgage payment

  • Pro: Spend the cash as you please

  • Pro: Typically offers a lower interest rate than a HELOC

  • Pro: Using the funds from a cash-out refinance to pay off your credit cards in full with can improve your credit score 

  • Con: May not be a good idea if interest rates have risen significantly since your original mortgage

Con: You will be extending your mortgage terms. By replacing your existing mortgage with a brand-new 30-year mortgage, for example, you will have to repay the loan for a longer time period.

About the HELOC

A HELOC is a revolving line of credit that is secured with the equity in your home. It works like a credit card, giving you an account you can withdraw money from whenever you need it. 

It has a draw period and a repayment period. You pay back the loan monthly and pay interest only on the amount of money you withdraw until the entire loan has been repaid (typically up to 10 years).

To determine the amount of your HELOC, your lender will consider the estimated appraised value of your home, the amount of your current mortgage, and any other loans secured by your property. 

Pros and cons of the HELOC 

As you might imagine because they are for shorter terms than 30-year mortgages, rates are usually a little higher with a HELOC. But, a HELOC can be a good option for someone who has an existing mortgage at a low interest rate. Since rates have risen since I bought my condo, a cash-out refinance would significantly raise my mortgage payment, whereas a HELOC would enable me to keep my original mortgage and simply tack on a new payment in a HELOC. The one downside to a HELOC is that is requires significant equity in the property, usually on the order of 40-50%.

  • Pro: Can do at any time, even if rates have risen

  • Pro: You keep your original mortgage and add a new HELOC payment

  • Con: Interest rates are usually higher than traditional mortgages

  • Con: Interest rates are almost always adjustable

  • Con: You typically need to have high equity in the property

A HELOC and a cash-out refinance are two ways to access the equity you have accumulated in your home. Which one is better? The experts at Bellco FCU explain.