Table of Contents
- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
Cash Out Refinance vs HELOC
Over the last couple of years, the average home value has seen a substantial increase. Due to this, many people are trying to tap into their equity for home improvement, to get a down payment for a second home, consolidating debts, etc.
There are two options to tap into your home equity, you can either get a home equity line of credit (HELOC), or a cash-out refinance.
Today we will compare cash-out refinance vs HELOC in Texas. Let us understand the pros and cons of both
What is Cash Out Refinance
In cash-out refinance, you get a new mortgage with a loan amount more than your previous mortgage balance.
For example, if you have a mortgage balance of $100,000 and you need a cashout of $50,000, the new loan amount after refinancing would be $150,000.
Cash Out Refinance Pros:
- The rate on the cashout refinance is lower compared to any debts you may have
- You have an option to select the tenure for your mortgages like 15 years or 30 years.
- You get to keep one single payment. It is one mortgage and one payment.
- Get a fixed interest rate for the entire tenure of the loan.
- Readily available with all lenders.
- The interest rate on your 1st mortgage may get tax benefits.
Cash Out Refinance Cons:
- It comes with higher closing costs.
- Qualifying for a cash-out refinance is more complicated than HELOC in Texas.
- You will have a less flexible term compared to HELOC. You don’t get a credit line where you can use only the amount you need, and you would get the money in a lump sum amount.
- If the market interest rates go higher than what you currently have got, you might end up paying a higher interest rate.
What is Home Equity Line Of Credit (HELOC)
HELOC is usually a second lien on the property. You get a line of credit against the equity you have in your house. You can utilize any amount you need from the HELOC and make a payment only for the amount you use.
For example, if you got a line of credit of $50,000 and you utilize $20,000 for remodeling your house. You would be charged interest only on the $20,000 that you withdrew, and not on the entire $50,000.
HELOC Pros:
- The closing costs for HELOC in Texas are lower compared to a cash-out refinance in Texas.
- It is easy to qualify for a HELOC in Texas compared to a cash-out refinance in Texas.
- You get the flexibility to utilize only the amount you need and pay interest for only the amount you use.
- Once you pay off the HELOC, it gives you access to tap into your equity again without going through the financing procedure
HELOC Cons:
- The interest rates on HELOC in Texas are sometimes variable.
- You may have to make a balloon payment of the amount used within a stipulated time.
- You would be making two different payments — one for your primary mortgage and the second for a HELOC.
- There may be charges for the inactivity of the HELOC account.
- The HELOC in Texas does not give any tax benefits unless the money is used for upgrading your property.
Conclusion
Now since we have understood the pros and cons of these two terms, we know what is best for us. It really depends on an individual’s needs and circumstances to determine which of the two is more beneficial.
If you still have any questions, you might want to get in touch with your loan officer to get suggestions on whether to go for a cash-out refinance or a HELOC, in Texas.
