This blog is for educational purposes only, not an offer of credit or advertisement for current loan terms. It does not provide legal advice. Refer to our loan web pages or consult professional advisors for specific information.
Whether you’re looking to renovate your living space or streamline your credit card debt, your home could be your greatest asset … literally. Homeowners with built-up equity have a powerful tool at their disposal, but with so many borrowing options available, deciding which one is right can be overwhelming. This post will break down three popular methods: HELOCs (Home Equity Lines of Credit), home equity loans, and cash-out refinances.
Understanding the Basics
All three methods allow you to borrow against the value of your home, minus your existing mortgage balance. But remember, your home will serve as collateral, so on-time payments are a must. Here's a quick comparison:
- HELOC: Functions much like a credit card in that you can borrow money up to an approved amount for a predetermined time period (known as the draw period). During this time, you can borrow money as needed and make minimum monthly payments that are often interest-only at a variable rate. Most draw periods last 10 years. Once the draw period ends, you enter the repayment period where you can no longer borrow against the line of credit and start paying both principal and interest over a set time period, typically 10 years. This option offers flexibility for ongoing projects, but the payment amount will fluctuate as rates change.
- Home Equity Loan: A fixed sum of money determined by your home equity that you repay over a set time period — essentially a second mortgage. This option offers predictability with fixed monthly payments and interest rates, but adds an additional payment along with your first mortgage, so be sure to crunch the numbers.
- Cash-Out Refinance: This loan option replaces your current mortgage with a new, larger one and the balance difference becomes your usable cash. It allows you access to a larger sum of money which is great for major renovations or a large purchase. However, you'll want to keep in mind the interest rate, as it may be higher than your original loan resulting in a different monthly payment. Additionally, depending on the term you choose, you could be adding more years to reach your payoff and potentially paying more interest over time.
Choosing the Right Fit
Here are some key factors to consider when making your decision:
- Cash Access: Do you need a lump sum for a specific project (fixed) or ongoing access to funds (flexible)?
- Budget Stability: Do you want a fixed payment each month or is a variable amount okay?
- Payment Simplicity: Do you prefer one monthly payment or is making two loan payments each month an option?
Ultimately, the best option depends on your specific needs and financial situation. Consulting with a financial advisor can help you weigh the pros and cons and make an informed decision. MIDFLORIDA Credit Union has a team of first and second mortgage specialists who can help you understand your options and choose the best product for your needs. Don't hesitate to contact us to discuss your financial goals and get personalized advice.
