How is a cash-out refinance different from a HELOC?
A home equity line of credit, or HELOC, is a loan that uses your home’s equity as collateral to guarantee repayment. You borrow what you need and make payments on the HELOC loan. If you miss payments on the HELOC, you risk losing your home, just like you would if you missed mortgage payments.
One key difference is that HELOC is not a type of mortgage itself and does not affect your existing mortgage—it’s a totally separate line of credit that you can draw on as needed, like a credit card. By contrast, a cash-out refinance replaces your existing mortgage and increases the loan amount.
If you have a mortgage and a HELOC, you’ll need to make payments to both of them since they’re separate loans. With a cash-out refinance, it’s all combined into one new mortgage loan.
The associated costs differ as well. When you refinance your home (whether it’s a cash-out refinance or a regular one), you have to pay new closing costs just like when you originally bought your home. Refinancing costs can amount to 2-5% of your mortgage principal when you factor in appraisals, inspections, early repayment fees, and more.
Fees involved in a HELOC also vary but can include application, appraisal, title search, lawyer costs, annual membership fees, inactivity fees, and others.
Finally, while there can be other reasons and benefits involved in home refinancing (which I’ll touch on below), the only thing a HELOC does is make cash available to you. However, that can be beneficial if you only need a small amount that doesn’t justify a whole refinance (and you’re unable to get the funds another way).