HELOC or Cash-Out Refi? What’s the Best Choice in 2024

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As a homeowner, figuring out the best way to access your home equity can be a complicated process, full of complicated jargon, long processes, scary waits for appraisals, and potentially expensive hidden costs. 

Here’s a look at the tradeoff between HELOCs and cash-out refinances—the two most common and popular ways to tap into your home equity while maintaining and keeping the ownership of your home. 

HELOCs vs. Cash-Out Refinances

First, here’s a look at what each of these are. 

HELOCs are revolving credit lines secured by your home equity, allowing you to borrow funds as needed up to your approved credit limit, and you generally pay interest on the amount you use. It is often added as a second or third lien on your home.

A cash-out refinance involves replacing your existing mortgage with a new one with a higher loan amount, often at a new interest rate. 

Best Reasons to Get a HELOC 

So why would you get a HELOC? Here are some of the top reasons. 

Flexibility of borrowing & repayment

HELOCs provide the flexibility to borrow funds as needed, avoiding the upfront lump sum received in a cash-out refinance. This flexibility is particularly beneficial for projects or expenses that unfold over time. 

Lower overall cost 

Even though your HELOC may have a slightly higher interest rate than your mortgage, in a cash-out refinance, many times, the new mortgage will have a higher interest rate than the older mortgage you are replacing, thereby often causing you to pay more interest overall. This is explained in this image:

Lower closing costs & fees 

A cash-out refinance will typically cost as much as 2% to 6% of the loan amount. Usually this includes an appraisal ($500 to $1,000), origination fee (1% to 3% of loan amount), credit report fee ($25 to $50), title insurance ($1,000 to $2,000), and recording fees ($50 to $100). In comparison, some HELOC providers like Aven.com will often have a $0 fee HELOC option, with no recording or notarization fees. 

Rewards and convenience 

Modern HELOC providers will sometimes have great rewards programs—for example, Aven.com provides a 2% unlimited cash back program on their card, which access their HELOCs. Figure and others provide discounts (25bps to 50bps) for turning on autopay. These can often add up to meaningful savings. 

Speed

HELOCS are often faster to get since they are not replacing your full mortgage and don’t require a full appraisal, so they will often use AVMs and automatically underwrite you. However, HELOCs will often require a higher credit standard. 

Best Reasons to Get a Cash-Out Refinance

What about a cash-out refinance? Here are some advantages.

Large borrowing amount

If you are borrowing a large amount of money (say, over $300,000), then even though your new interest rate is higher than the previous mortgage, the lower APR compared to a HELOC can offset the higher closing costs and fees for a cash-out refinance. 

Higher cost but lower monthly payments 

Due to the nature of a mortgage being 30 years, even though you pay more interest in total over a long duration, your monthly payments may be a bit lower due to the longer term length. This, however, means you’re often paying more in actual interest expense over that time period. 

Final Thoughts

There are some great options for each one. Modern HELOC providers like Aven.com also provide rewards like 2% unlimited cash back on their products.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.