HELOC vs. Mortgage: Which One is Best for You?
The average U.S homeowner now has more then $274,000 in equity- up significantly from $182,000 before the pandemic, according to Corelogic Q1 2023 Homeowner Equity Insights report. Homeowners have more equity in their homes then ever before, and with the pandemic and this years financial struggles, now is the time that many want to use it and get cash in hand. There are two main ways of going about that between Home Equity Lines of Credit (HELOCs) and doing a conventional mortgage, more particularly a cash-out refinance (CORF). But how do you know which one is the best fit for your unique financial situation? In this article, we’ll dive into the benefits and downsides of both HELOCs and CORFs to help you make an informed decision.
The Pros and Cons of Home Equity Lines of Credit (HELOCs)
Benefits:
Interest Only Payments: In the initial stages of the loan, many HELOCs allow you to make interest-only payments, providing flexibility in your monthly budget. There is a small downside of not building your credit, but this is generally a boon.
Flexibility: Unlike a lump sum loan, a HELOC is a revolving line of credit. This means you can borrow, repay, and borrow again. So you can only take what you need or take more when needed.
Lower Closing Costs: Generally a HELOC will be cheaper than a cash out refinance since you are getting a new loan with a CORF.
Downsides:
Variable Interest Rates: The same feature that can be a boon can also be a bane. Your interest rate on a HELOC can also go up, potentially increasing your payments. And since we have been in a rapidly rising interest rate environment, this means that your rate will likely get worse before they get better.
Potential for Overborrowing: Since it's revocable, there's a temptation to borrow more than necessary, which can lead to increased debt.
Potential for Lowering Your Credit Limit: Just like a credit card, if your financial situation changes, or your home's value worsens the lender could decide to lower your credit line or close it.
Benefits and Downsides of Conventional Mortgages (Cash Out Refinances)
Benefits:
Higher Debt-to-Income (DTI) Guidelines: Unlike other loan types, CORFs often come with higher DTI requirements. CORF's can go up to 55% DTI ratio where HELOC's generally go up to 40% DTI. This can be beneficial for those who might have a higher debt load, making it easier for them to qualify.
Easier Credit Score Requirements: CORF's have lower credit score requirements than HELOCs. They Because of the leniency in DTI and credit, many homeowners find that qualifying for a CORF is simpler than other financial products.
Lower Rates: Generally, CORFs have lower interest rates averaging around the low 8% range where HELOC's are averaging in the low 9's (at the time of this post 9-26-23). This can result in significant savings over the lifespan of the loan.
Downsides:
Closing Costs: Since a CORF is refinancing your home, it comes with closing costs, which can be a significant amount.
Longer Commitment: Typically, CORFs have longer repayment terms generally 30 years, meaning you might be paying off the loan for a more extended period than other options.
Larger Monthly Payments: Given that you're taking a lump sum, monthly payments can be higher compared to a HELOC where you only pay interest initially.
Your Equity, Your Decision: Let Chissell Mortgage Guide You
Choosing between a Cash out Refinance and a Home Equity Line of Credit can be daunting, especially when determining which aligns best with your financial goals. At Chissell Mortgage, we're here to demystify the process and help you make an informed choice. With your equity and our expertise, the best decision is just a call away. Reach out to us at chissellmg.com or dial 727-376-6900. Together, let's pave your path to financial freedom.
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