Mortgage Refinancing vs Home Equity Loans & Lines of Credit: What’s the Difference?
If you've paid down your mortgage and your home has increased in value, you may have built up equity. That equity can often be used to access cash for other major expenses. Three common ways to do this are through a cash-out refinance, a home equity loan, or a home equity line of credit (HELOC).
What Is a Cash-Out Refinance?
Refinancing replaces your existing mortgage with a new one. With a cash-out refinance, the new loan is larger than your current balance, and you receive the difference in cash at closing.
Example:
- Your home is worth $300,000
- You owe $200,000 on your mortgage
- You refinance for $250,000
- At closing, you get $50,000 in cash (minus fees)
- You now have one new mortgage for $250,000
What Is a Home Equity Loan?
A home equity loan is a separate, second loan that uses your home as collateral. It doesn’t replace your mortgage, so you’ll have two monthly payments with one for your mortgage and one for the equity loan. These loans usually come with a fixed interest rate and a set repayment term. If you're asking whether to choose a home equity loan vs refinance, your decision may depend on your current mortgage rate, your budget, and how you plan to use the funds.
Example:
- Your home is worth $300,000
- You owe $200,000 on your mortgage
- You take out a $50,000 home equity loan
- You now have two loans: your original $200,000 mortgage + $50,000 equity loan
- You make two separate, monthly payments
What Is a HELOC?
A Home Equity Line of Credit (HELOC) gives you access to revolving credit, similar to a credit card, based on your home equity. You can borrow as needed during a draw period, then repay it with variable interest. When considering cash-out refinance vs HELOC, think about your repayment flexibility, how much you need, and whether you prefer fixed or variable rates.
Example
- Your home is worth $300,000
- You owe $200,000 on your mortgage
- You have $100,000 in equity
- Your lender approves a $50,000 HELOC
- You can borrow from that $50,000 as needed (like a credit card), not all at once
Questions to Consider Carefully Before Choosing Refinancing vs Home Equity Financing
How much cash do I need, and all at once or over time?
- If you need a large lump sum, like for a major renovation or debt payoff, a cash-out refinance or home equity loan may be a better fit because they give you a fixed amount upfront.
- If you need flexible access over time, like for ongoing projects or medical bills, a HELOC acts more like a credit card, letting you borrow as needed during a draw period so you only pay interest on what you use.
Is my current mortgage rate higher or lower than today’s rates?
- If your current rate is higher, a home loan refinance may lower your interest rate and provide cash, potentially saving you money on your monthly payment.
- If your rate is already low, refinancing could raise your rate or extend your loan term. In that case, a home equity loan or HELOC lets you keep your favorable mortgage while still accessing funds.
Am I comfortable with a second monthly payment?
- A cash-out refinance replaces your existing mortgage, so you’ll still have just one monthly payment, though it may be higher than before.
- A home equity loan or HELOC adds a second loan on top of your mortgage, so you’ll have two monthly payments, which may affect your cash flow and budgeting.
What am I using the money for?
- For one-time expenses with a known cost, like a kitchen remodel or paying off a specific loan, a home equity loan or cash-out refinance provides a lump sum with predictable payments.
- For ongoing or unpredictable costs, like phased home improvements, a HELOC gives you the flexibility to borrow and repay as needed.
How long do I plan to stay in my home?
- If you plan to stay long-term, a cash-out refinance may be worth the higher upfront costs since you have more time to benefit from a potentially lower rate or better terms.
- If you plan to move in the next few years, a home equity loan or HELOC may be more cost-effective with fewer fees and less long-term commitment.
Ready to Make a Move?
Still wondering, should I refinance or get a home equity loan or HELOC? Let’s talk through your options. Connect with a Midland States Bank loan expert today to get clear, personalized answers and move forward with confidence.
