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.