This article is presented by Aven. Read our editorial guidelines for more information.
As a homeowner, understanding the best way to access your home equity can be complex and daunting. The process often involves navigating through jargon, lengthy procedures, appraisals, and potentially hidden costs.
Here we explore the tradeoff between HELOCs and cash-out refinances—the two most common methods of tapping into your home equity while retaining ownership of your home.
HELOCs vs. Cash-Out Refinances
First, let’s understand what each of these entails.
HELOCs are revolving credit lines secured by your home equity, allowing you to borrow funds as needed up to your approved credit limit. You generally pay interest on the amount you use, and it is often added as a second or third lien on your home.
A cash-out refinance involves replacing your existing mortgage with a new one with a higher loan amount, often at a new interest rate.
Best Reasons to Get a HELOC
So why would you get a HELOC? Here are some of the top reasons.
Flexibility of borrowing & repayment
HELOCs provide the flexibility to borrow funds as needed, avoiding the upfront lump sum received in a cash-out refinance. This flexibility is particularly beneficial for projects or expenses that unfold over time.
Lower overall cost
Even though your HELOC may have a slightly higher interest rate than your mortgage, in a cash-out refinance, many times, the new mortgage will have a higher interest rate than the older mortgage you are replacing, thereby often causing you to pay more interest overall.
Lower closing costs & fees
A cash-out refinance will typically cost as much as 2% to 6% of the loan amount, including appraisal, origination fee, credit report fee, title insurance, and recording fees. In comparison, some HELOC providers like Aven.com often have a $0 fee HELOC option, with no recording or notarization fees.
Rewards and convenience
Modern HELOC providers will sometimes have great rewards programs—for example, Aven.com provides a 2% unlimited cash back program on their card, which accesses their HELOCs. Others provide discounts for turning on autopay. These can often add up to meaningful savings.
Speed
HELOCS are often faster to get since they are not replacing your full mortgage and don’t require a full appraisal. However, they will often require a higher credit standard.
Best Reasons to Get a Cash-Out Refinance
What about a cash-out refinance? Here are some advantages.
Large borrowing amount
If you are borrowing a large amount of money (e.g. over $300,000), then the lower APR compared to a HELOC can offset the higher closing costs and fees for a cash-out refinance.
Higher cost but lower monthly payments
Due to the nature of a mortgage being 30 years, your monthly payments may be lower due to the longer term length, even though you pay more interest in total over the duration.
Final Thoughts
There are great options for each method. Modern HELOC providers like Aven.com also provide rewards like 2% unlimited cash back on their products.
This article is presented by Aven
Aven is a technology company creating innovative ways to save people money. Our first product, the Aven Home Card, is the world’s only credit card backed by home equity. It functions like any other credit card, enabling you to make everyday purchases and earn unlimited 2% cash back, while offering the lowest rate of any credit card, guaranteed.
Aven also offers Aven Advisor, a mobile-first financial advisor, and the Aven Auto Card, a credit card backed by auto equity.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
