A home equity line of credit, or HELOC, is a type of second mortgage, while a refinancing is where the terms of the existing debt are renegotiated. A refinancing pays off the existing mortgage and opens a new loan with new terms, whereas a HELOC leverages the equity in your home to open a line of credit. A home equity line of credit, or HELOC, is a type of second mortgage, vs a cash out refinance which replaces your existing mortgage with a new loan of a greater amount. The proceeds from that loan pay off your existing mortgage and the remaining funds go to you.Home Equity Line of Credit vs Cash Out Refinance
Home Equity Line of Credit vs Refinance FAQs
A Home Equity Line of Credit (HELOC) allows you to borrow secured funds against the equity you have in your home without having to refinance your mortgage. A Refinance lets you replace your existing mortgage with a new loan, typically one that offers a lower interest rate or different payment terms.
Yes, both options can offer potential tax benefits depending on how much money is borrowed, and whether it's used for home improvements or debt consolidation. With HELOCs, interest payments may be eligible for deductibility under certain conditions as specified by the Internal Revenue Service (IRS). Borrowers may also be able to deduct certain fees related to their refinance transaction.
Both options can carry a significant financial risk if borrowers don't make payments on time and in full as required by their loan agreement. Taking out a larger loan than you can afford increases the risk that you could default on your loan, which could result in foreclosure proceedings being initiated against your property. Additionally, when refinancing, homeowners should confirm they are not paying more in closing costs than they will save from a lower interest rate over the life of their new loan.
The payback timeline for both options is typically determined by the borrower's loan agreement. A HELOC may have a draw period of up to 10 years and repayment terms spanning anywhere from 15-30 years thereafter. When refinancing, borrowers can generally choose between a longer fixed-rate mortgage with regular monthly payments over 15, 20, or 30 years, or an adjustable rate option where their payments could change based on market conditions.
Both a Home Equity Line of Credit (HELOC) and Refinance offer potential financial benefits when utilized responsibly. Taking out a HELOC can provide access to cash without having to refinance your existing mortgage, while a Refinance could help you lower your monthly payments and save money on interest over the life of your loan. Additionally, both options can potentially offer tax benefits depending on how the funds are used. It's important to weigh all of your financial options carefully before making a decision.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.