Home Equity Line of Credit (HELOC) vs. Refinancing: Which is Better for You?

Homeownership is likely one of the biggest investments you’ll make in your life, and one of the questions that comes along with this investment is how you can take advantage of your home’s equity as time passes.

Two of the more common options available to folks who are looking to take advantage of the investment they made when buying a home are refinancing or a Home Equity Line of Credit (HELOC). When considering which is the better option for you, it’s important to weigh the advantages of each alongside your individual financial needs, credit, as well as how much equity your home has accumulated.

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What is a Home Equity Line of Credit (HELOC)?

A HELOC allows homeowners to borrow money against the equity in their home and use the funds for a variety of purposes. While most often used for home improvements or to consolidate high-interest rate debt, a HELOC can be used to accomplish a range of goals related to your home .

With a variable-rate HELOC, borrowers who require standalone and second mortgage financing may obtain a fixed Annual Percentage Rate for the initial term of the loan, followed by a rate based on the current Prime index for the life of the loan.

By combining a traditional first mortgage with this second mortgage program, borrowers may potentially avoid higher-cost financing options as well as private mortgage insurance, all while giving them access to funds for their current needs. Like with refinancing, there are many factors to consider when deciding if a HELOC is the right mortgage solution for you.

HELOC Pros
  • Can avoid higher-cost financing options
  • Can avoid paying for Private Mortgage Insurance
  • Closing costs are low or non-existent
  • Access to funds for a range of homeownership needs
HELOC Cons
  • You will be making two payments on your house instead of one
  • Monthly payments can increase if interest rates rise
  • Reduces equity in your home

What is Refinancing?

Homeowners can refinance their existing mortgage to take advantage of lower interest rates to help lower their monthly payments , or to tap into the equity in their homes. Refinancing to borrow against the equity in your home is more commonly known as a cash-out refinance . There are important pros and cons to consider when deciding whether a cash-out refinance is the right option for you.

Cash-Out Refinance Pros
  • Funds can be used for a variety of purposes including home repairs, debt consolidation, school tuition, or medical expenses
  • Interest can be tax deductible
  • A variety of loan terms are usually available (term, fixed, and variable-rate options)
Cash-Out Refinance Cons
  • Depending on your existing mortgage rate, you could end up with a higher interest rate and monthly payments
  • May extend the timeframe for paying off your mortgage
  • May incur closing costs associated with refinancing
  • May have to pay for Private Mortgage Insurance

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Resources

We’ve created a library of resources to help answer any questions you may have about how a HELOC can be used to help accomplish your homeownership goals. Whether you’re trying to make improvements to your home or thinking about retirement, visit the links below for more details about HELOCs:

If you have any questions about HELOCs don’t hesitate to reach out to our Residential Lending team or get a rate quote today!