Which is Best for You: Home Refinance vs. HELOC

If you’re in need of cash and you own a home, you may have heard that there are some popular options: You can do a cash-out refinance, or you can take out a home equity loan (also known as a second mortgage). They both allow you to borrow money using the value of your home, but they do so in different ways.

To help you decide which could be best for you, this guide will go over each in simple terms without using technical terms.

What is Home Refinance?

Getting a new loan to replace your existing mortgage is known as a home refinancing. Usually, people use this to borrow more money or to get a reduced interest rate.

Types of Home Refinance:

• Basic Refinance: You change your loan to get a better rate or shorten the time it takes to pay off.
• Cash-Out Refinance: You take out a larger loan and receive the excess money as cash.

What Is a HELOC?

A HELOC (Home Equity Line of Credit) is a bit like a credit card that’s connected to your home. You get approved to borrow up to a certain amount. You can borrow, pay it back, and borrow again during the time the lender allows.

This loan does not replace your current mortgage. It acts second loan that sits on top of your regular home loan.

Main Differences Between Home Refinance and HELOC

Let’s compare these two in a few important ways:

1. How Do You Get the Money

• Home Refinance (Cash-Out): You get one big lump sum.
• HELOC: You get a line of credit and can take out money as needed over time.

Best for:

• Refinance: Big one-time costs like home repairs or debt.
• HELOC: Small or spread-out expenses.

2. Interest Rates

• Home Refinance: Often has a steady interest rate that stays the same.
• HELOC: Often has a rate that can go up or down.

Best for:

• Refinance: If you want the same payment every month.
• HELOC: If you’re okay with changes and want flexibility.

3. Monthly Payments

• Home Refinance: You make one set payment every month for the life of the loan.
• HELOC: You may pay only interest at first, then more later.

Best for:

• Refinance: Long-term stability.
• HELOC: Lower payments at the beginning, but might rise later.

4. Upfront Costs

• Home Refinance: Comes with closing costs, usually a few thousand dollars.
• HELOC: May have low or no upfront fees, depending on the lender.

Best for:

• HELOC: If you want to avoid big upfront costs.
• Refinance: If you're okay paying now to save later.

5. Your Current Mortgage

• Home Refinance: Replaces your old mortgage with a new one.
• HELOC: Adds a second loan—you’ll have two to manage.

Best for:

• Refinance: If you want to roll everything into one simple loan.
• HELOC: If you like your current loan and don’t want to change it.

When to Choose a Home Refinance

Choose a home refinance if:

• You want a lower interest rate than you have now.
• You need a large amount of money all at once.
• You want to switch from an adjustable-rate loan to a fixed one.
• You plan to stay in your home for several years.

When to Choose a HELOC

Choose a HELOC if:

• You want to borrow money little by little.
• You already have a good mortgage rate you don’t want to lose.
• You want lower upfront fees.
• You can handle changing payments over time.

Quick Comparison Table

Questions to Help You Decide

Ask yourself these simple questions:

Do I need all the money now or over time?
Now = Refinance
Over time = HELOC

Is my current mortgage rate high?
Yes = Refinance may help
No = HELOC could be better

Do I want steady payments?
Yes = Refinance
No problem with changes = HELOC

Can I afford upfront costs?
Yes = Refinance
No = HELOC may be a better option

Both home refinance and HELOCs are smart ways to leverage the equity in your home. Which is best for you depends on how much money you need, how you’d like to repay the loan, and how long you plan to stay in your home.

Choose a home refinance if you want a lower payment or cash all at once.
Choose a HELOC if you want borrowing flexibility and lower upfront costs.

No matter which option you choose, make sure to read the fine print and compare offers from different lenders. A little research can save you a lot of money.