Cash Out Refinancing Versus HELOCs: The Pros And Cons

One of the best financial benefits one can get out of home ownership is that you get to build your home equity. In a nutshell, equity represents the amount you own out of the value of your home. For example, you borrowed money to help finance your home purchase. You can calculate your home’s equity by getting the difference of your home’s current market value with your total mortgage debt. This only means that your home equity can be a tremendous asset, but how can you take advantage of it?

The thing is, home equity is tremendous wealth trapped. However, the good news is you can turn it into cash that you can use for a number of purposes. You can do this with the help of a Home Equity Loan. In Texas, there are two types you can choose from – Texas Cash Out and Home Equity Line Of Credit. Each option has its pros and cons. Homeowners should take into consideration the benefits and drawbacks of each loan type before making a final decision.

Good Read: 5 Smart Ways to Use Your Home Equity

Pros of Cash Out Refinancing

  • You have the freedom to use the money as desired
  • You can choose between refinance loans types with varying terms and rates
  • One can pull up to 80% of your home’s value
  • Interest rates tend to be lower than HELOCs
  • Using the money, you get out of a Cash Out Refinance Loan to pay off credit cards in full helps to improve your credit score dramatically and saves you tons of money in interest.
  • It provides the opportunity to reduce taxes and have a bigger tax refund in return.

Cons of Cash Out Refinancing

  • You’ll need to pay off your first mortgage first before you can qualify for a Cash Out Refinance Loan
  • Since your home is your collateral, you can’t risk losing it if you’re unable to pay your lender back
  • One needs to pay for the closing cost
  •  You would need to pay for Private Mortgage Insurance if you got more than 80% worth of your home’s value
  • Refinancing with a Texas Cash Out can leave you with a bigger and longer mortgage payment

Pros of Home Equity Line Of Credit

  • It allows you to maintain your current mortgage terms
  • One can choose when to withdraw funds as you deem necessary
  • You can choose to use the money in any way you want
  • HELOC interests are tax-deductible when you use it on home improvements or acquisition
  • It usually has a lower closing cost than any other Home Equity Loans or traditional mortgages
  • You only pay for the amount you’ll be using

Cons of Home Equity Line Of Credit

  • Since HELOCs are secondary mortgages, getting qualified means you’ll need to make two loan payments to repay your lender
  • Interests are not tax deductible if you don’t use the funds for home acquisition or updates
  • HELOC interest rates are usually higher than Cash Out Refinancing
  • Variable rates may be riskier, depending on your situation and your lender’s terms and conditions.

At the end of the day, homeowners should realize the risk and benefits before accessing your home equity. Whichever option you decide to take will be a huge financial decision. So, make sure to weight in the pros and cons, explore other ways on how to turn your equity to cash, and to shop for lenders to make the most out of your equity.

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