Financial experts believe that both home equity lines of credit (HELOCs) and cash-out refinancing are set to surge as more people take advantage of historically low-interest rates before the upcoming rate increase issued by the Federal Reserve. But what's the difference between the two?
HELOCs (Home Equity Line of Credit)
What they are
A HELOC is a loan that uses your home's equity as collateral. The interest you pay on a HELOC is usually fixed, and the loan usually has a term of 10 to 30 years. You can use a HELOC to pay off your existing debt or purchase a new home. However, you must crunch the numbers first to ensure you're getting a better rate. Try this debt loan calculator to determine if a HELOC is better for your unique financial situation.
The benefits of HELOCs
The benefits of HELOCs include:
1. You can use a HELOC to pay off your existing debt or purchase a new home.
2. You can borrow up to 100% of the value of your home, which is much higher than the maximum amount you can borrow with cash-out refinancing.
3. The interest you pay on a HELOC is usually fixed, and the loan usually has a term of 10 to 30 years.
The risks of HELOCs
The risks of HELOCs include:
1. If you can't keep up with your payments, your HELOC could become delinquent, and you could lose your home.
2. If you decide to refinance your HELOC, your new lender may require you to pay off your old HELOC with the new loan. This could result in a big dent in your home's equity.
3. If the market crashes, your home's value could decrease, which could cause you to pay more on your HELOC than you originally borrowed.
Cash-out refinancing
What it is
Cash-out refinancing is a type of refinancing where you take out a new loan to pay off your existing debt and use the money to purchase a new home. The interest rate on a cash-out refinance is usually fixed, and the loan usually has a term of 5 to 10 years.
How to qualify for cash-out refinancing
To qualify for a cash-out refinancing offer you must:
- Have a minimum credit score of at least 600 - 640, depending on your lender.
- A debt-to-income ratio of less than 50%.
- At least 20% equity in your home.
- Have owned your house for a certain length of time (varies by lender)
The benefits of cash-out refinancing
The benefits of cash-out refinancing are:
1. You can use cash-out refinancing to pay off your existing debt or purchase a new home.
2. The interest rate on a cash-out refinancing is usually fixed, and the loan usually has a term of 5 to 10 years.
3. Cash-out refinancing is a quick and easy way to get money for large home improvement projects like HVAC upgrades, a new roof, etc.
The risks of cash-out refinancing
The risks of cash-out refinancing are:
1. The interest rate on a cash-out refinance can be higher than the interest rate on your existing debt.
2. If you don't have a good credit score, you may not be able to get a cash-out refinance.
The bottom line
Both HELOCs and cash-out refinancing might surge in popularity as rates on these types of loans will increase soon. If you're looking to purchase a home and need money quickly, cash-out refinancing may be the best option for you. However, be sure to compare interest rates and terms carefully before you decide.
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Original Source: Credello: What is the Difference Between Cash-Out Refinancing and HELOCs (Which Are Both About to Surge)
