REFINANCE Archives - Cardinal Financial

HELOCs vs. Cash-Out: The Best Way to Fund Renovations

If spending more time at home these days has you thinking about doing some renovations, you’re in good company. But have you thought about how you’re going to fund those renovations? Tapping into your home equity is a great place to start, and for many homeowners, HELOCs come to mind. However, with the uncertainty of today’s housing market, home equity lines of credit (HELOCs) have been harder to come by. What’s more, they may not even be your best option.

Have You Heard of HELOCs?

If you’ve never heard of HELOCs, here’s the lowdown:

A home equity line of credit (or, HELOC) is a loan in which the lender agrees to lend a maximum amount within an agreed period, where the collateral is the equity in your house. Think of it like a credit card that’s connected to your home equity rather than your bank account.
A HELOC is often referred to as a lien on your home or a second mortgage because it is another loan in addition to your first mortgage.
HELOCs have their merits and are typically considered a secure form of debt, but you’ll see there are a number of drawbacks to this type of financing.

HELOCs: The Downsides

So if a HELOC is just a loan that lets you use your home equity, what could be the disadvantages? Well, for starters:

Getting a HELOC means adding another monthly payment to what may already be a tight budget.
HELOCs come with adjustable rates, which means payments will fluctuate—sometimes each month. This can make budgeting more difficult and put you at the mercy of an unpredictable market.
You may have to pay different fees throughout the course of a HELOC, like an annual fee or inactivity fee.
You’re required to pay interest on the money you withdraw. And although HELOCs offer the option of interest-only payments for a period of time, you risk making payments for longer than you need to.
The interest you pay on HELOCs is only tax deductible if it’s used to build on or improve the home that secures the loan.
HELOC lenders only allow you to withdraw money during a predetermined “draw period,” and they usually enforce a minimum draw requirement. That means you have to take out the minimum required amount even if it’s more than what you need at the time.
Since a HELOC is a loan secured by your home, if you’re unable to make payments on your HELOC, you risk losing your home.

While there may be some benefits to HELOCs, the risks seem high—even for lenders. Given the uncertainty of today’s market, and the fact that the lender’s risk is also higher with a second loan, HELOC lenders are pulling back on offering this type of financing.

So if HELOCs are risky and harder to come by, yet Americans are sitting on more home equity than ever before, how do you get cash to renovate your home in the current market?

HELOC vs. Cash-Out Refinance

Cash-out refinance to the rescue. Here’s what it all boils down to: why get credit when you can get cash? After all, it’s your hard-earned home equity on the line. That’s why we offer cash-out refis as our solution for homeowners who want to leverage their home equity. Take a look at the benefits:

Refinance your mortgage for more than what you currently owe and pocket the difference in cash. It’s one monthly payment—no separate loan!
Lock in at today’s low rate for the life of the loan. A fixed rate equals predictable payments, making budgeting easier and less stressful. Plus, current rates are pretty darn low.
All fees for a cash-out refi are collected up front, and interest rates are typically lower than that of HELOCs.
No draw periods, no minimum draw requirement, no extra interest-only payments. The only caveat is lenders limit how much cash you can take out to keep you from tapping into 100% of your home equity.

Why get credit when you can get cash?

Get Cash Out Today

There’s a lot to consider when it comes to leveraging your home equity. Not only do you have to think about how you’ll spend it, but how you’ll access it, too. And with today’s unique market where rates are low and home values are high, the time is right to get cash from your home equity.

It’s all in the name: refinance your mortgage, get cash from your home equity to spend how you want. It never hurts to compare your HELOC vs. cash-out options. Get a free quote today to see how much home equity you might have access to and find out the interest rate you could lock in for the life of the loan.

This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before making the decision to buy or refinance a home.

Thinking of refinancing your home loan, but not sure how long it will take? Read our breakdown of the refi timeline.

If your home equity is high, now could be a great time to refinance your home loan. But what exactly does a refi entail, and how long does it take?

While no two refi timelines will be the same, we’ve broken down the standard steps of the process and how long you can expect to spend in each. The shortest step? Reading this blog.

What kind of refi should I get?

At the very beginning of the refi timeline, you’ll be faced with a fork in the road: rate-and-term or cash-out?

In a rate-and-term refi, you’ll get a new (you guessed it) rate-and-term without advancing any new money. If you’re looking to lower your monthly payment or pay off your mortgage sooner, a rate-and-term could be the right fit for you. After all, a lot could’ve changed since you first bought your home and you may qualify for better terms now than you did before (hello, home equity*).

Speaking of home equity, a cash-out refi lets you turn that equity into cash. Keep in mind that because you’re taking cash out, you could end up with a higher monthly payment to cover this. If you’re looking to build even more equity with upgrades like a kitchen remodel or pool, a cash-out refi is a great way to fund those home improvements.

So, if you want a lower monthly payment, a rate-and-term fits the bill. If you want to leverage your home equity for more flexible funds, a cash-out could be the better option for you.

*Equity is the value of your home minus the amount still owed on your mortgage. Your equity increases over time as the market changes and you make payments on your home loan.

How do I start the refinance process?

The first thing you’ll do is reach out to your lender (or a few lenders if you want options) for a rate quote. You could have your quote within minutes, but take a few days to consider your options. With your lender chosen and quote in hand, it’s time to apply for your refi.

During the application process (which typically takes a few days to a couple of weeks), you’ll need documentation similar to what you provided for your purchase: recent pay stubs, W-2s, and bank statements to name a few. Once you’ve applied, your lender will put together some options for your new rate, then you’ll lock in your best fit.

In the next few weeks, your lender will verify and review all the information you provided in the application, just to make sure everything is accurate. This is called underwriting, and it’s also the point in the timeline where you’ll need a refinance appraisal.

Why do I need a refinance appraisal?

You got an appraisal when you purchased your home, so why do you need another one to refi?

A refinance appraisal is key to qualifying for the new rate you want, and for determining how much cash you can actually get in a cash-out refinance. Over the life of your mortgage, your home has been building equity, whether that’s from upgrades you’ve made like installing new appliances or external factors like the housing market. An appraisal will tell you just how much value your home has accrued since you bought it.

At this point, your lender will order the appraisal for you, the appraisal company will send someone to assess your home, and you’ll get a professional estimate of its value. Depending on how fast the appraiser gets back to you, the whole process could take a few days to a couple of weeks.

I got my refinance appraisal. What’s the refi timeline from here?

You’ve got your appraisal, which means you’re almost done! A few days before closing, your lender will send you closing disclosures. You should review these carefully to make sure everything is correct and ready to be finalized. Once you’ve reviewed the documents, your lender will help you set up a time and place for closing. You, your co-borrowers if you have them, and a lawyer or closing agent will need to be there.

On the big day, you’ll sign the final documents and pay any costs that haven’t been rolled into your new mortgage loan. If you’re getting a cash-out refi, you’ll receive the check at or within three business days of closing.

And that’s it! From rate quote to close, the whole process typically takes 30-45 days.

How soon will I need another refi?

While there’s no limit to the number of times you can refinance your home, you should wait at least long enough for something significant in your finances or the housing market to change. That could be any number of things, including reducing your debt-to-income ratio (the percentage of your monthly income spent on debt payments), building your credit score, or completing home upgrades.

So, how soon you’ll need another refi is different for everyone—you might never need to, or you may find yourself refinancing as early as six months down the line. Just remember that you’ll have to pay all the fees and closing costs associated with the process each time.

If you’ve crunched the numbers and decided to refi, you can depend on us to help get all the details in order, from the beginning of the refi timeline to the end.

From rate quote to close, the home loan refi process typically takes 30-45 days. A dependable lender will make sure you’re in the loop for each and every one of those.