HELOC vs Cash Out Refi [Which is right for YOU?]

When considering a HELOC vs cash out refinance from your mortgage broker, first understand what a home equity line of credit and a cash out refinance are, then make a decision based on your specific circumstances. In this video I explain both types of mortgage loans, give examples, and offer my expert opinion as a mortgage lender. Be careful, accepting the wrong product could literally cost you THOUSANDS of dollars. That's why I make these videos: to help save you money!

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Video Transcript

Hey guys, welcome back to the channel. If you're here with me today, it's because you're interested in finding out about a home equity line of credit in relation, or in comparison to, a cash-out refinance. So that's what you're looking for, I've got those answers for you, today. Make sure you stay with me till the end of the video. 

If this is your first time here, my name is Stephanie Weeks. I'm a 17 year veteran loan officer, and I am obsessed with mortgage financing, weird right? Like, seriously, but yes, I don't know why I haven't figured that out yet, but, I am. And, I've been recognized in the top 1% in the nation, for loan officers and loan production, for several years in a row. And as at 2019, I'm also recognized in the Scotsman, the Top Originators guide as well, as one of the top 4,000 originators. In the U S, there're over 300,000 originators, or loan officers in the US. So, very excited for those accolades, I've worked very hard for that. And of course thank, all of my amazing, amazing customers, for getting me there. 

You have reached your one stop shop for anything, and everything mortgage education. I drop new videos every Tuesday and Saturday. 

Knowing the difference, between, a home equity line of credit, and an actual cash-out refinance is huge. And if you don't know the difference, it could cost you, thousands and thousands, and thousands of dollars. So stay tuned to the end of this video so that I can give you all of the scoop. 

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I've broken this down into five things that we can talk about. Number one, what is a home equity loan? Let's keep it really simple. Let's say if you own a home, that home was worth $100,000. Just for this example, let's say you don't even have a mortgage. So in that case you have $100,000 in equity, in that home. So, how would you do, what would you do to get that? Well, you can sell it. You can sell the home and get the $100,000, but maybe that's not what you're trying to do. Maybe you want $50,000, what can you do? You can do a home equity loan. So you go to a bank, mortgage company, mortgage lender, whatever works for you, mortgage broker and apply for a $50,000 loan. You can apply for a fixed rate mortgage. 

That would be a cash-out refinance, because you are pulling cash or equity out of the property and not just paying off an existing lien or and also in this example, because you don't have a mortgage, you could do a home equity line of credit. We're gonna talk about those differences. 

But let's say that you do have a mortgage. Let's say that the home is worth $100,000. You owe $10,000, just to keep everything simple. You want to get a $10,000 loan as well, pull up $10,000 in equity, so now you want $20,000 total, or maybe you just want the 10. You can do a cash-out refinance, to pay off the 10, pull out another 10, that way you have one new loan, as a cash-out refinance. You could do a home equity line of credit, where you keep your current first mortgage, or that $10,000 in place. And you get a home equity line of credit, that's in second position, behind that mortgage. Or you could actually do another option, which would be a second mortgage, which is a fixed rate instead of a line of credit, which is an adjustable rate. So that is what a home equity loan is. We're gonna dive into further details in the next steps. 

Breaking it down further for you. What is a cash-out refinance? A cash-out refinance is a mortgage loan, against your property, when you were paying off anything, besides an existing lien, and maybe rolling in closing cost. Let me give you a couple of examples. You owe $100,000 on your home, it's worth $200,000. You wanna get a new loan, to pay off your mortgage, roll in the closing cost, but maybe you want another $10,000 back to do, I don't know, maybe you wanna go on vacation. That would be a cash-out refinance whereas if, in the same example, you have, you owe $100,000 on your home, it's worth $200,000, you want a mortgage, to pay off your $100,000 and rolling closing costs, and that's it. That's just a rate and term refinance. What some people don't realize is that even if you don't have a mortgage against your property, and now you wanna put a mortgage against your property to pull equity out, it’s still called a cash-out refinance. So unless you did a first and second mortgage simultaneously at the purchase of the home, which is very few, and far between, unless you did that, and you're paying off those two mortgages as purchase money, in any other example, if you're paying off anything besides an existing loan and rolling and closing cost, like paying off other debt, paying off second mortgages, taking some cash out for whatever you want. Those things are called cash-out refinances. 

Number three, what's a home equity line of credit? The cash-out refinance is a fixed mortgage, 10, 15, 20, 25 or 30, is a fixed term, amortize, typically no balloons, typically no adjustments. And the rate does not adjust. So it's fixed for that amortization for you. Well, a home equity line of credit does have amazing purposes, for certain people and certain reasons, for the most part, not so much. Why? If you can get, and I'm not quoting a rate here, I'm just giving an example. But, let's say if you have the option, to get a cash-out refinance at an interest rate of three and a half percent and it's fixed, okay, well that home equity line of credit, that might be four and a half percent interest. And it's not fixed, it's adjustable based on the prime rate of money, which changes. So it's an adjustable rate. And, the line of credit, typically, has some type of balloon or renewal, maybe every five years, even further on top of that, you get a line of credit, you can't put an escrow account with that if you want it to, you may or may not. And another thing about it is, it only requires interest only payments, which can get some people in trouble. 

Remember, we talked about that cash-out refinance. Let's say if your payment was principle, interest, property taxes, home insurance, mortgage insurance, who knows, okay. But, the home equity line of credit, it's not gonna be principle and interest. It's gonna be interest only, and you can't put the escrow in. So if you only pay, the minimum that they say is due, you're never paying down that principle. You may be saying, oh, that's terrible. It's not, there are purposes and good reasons. And some examples, where this is a fantastic option for somebody, but it's not a fantastic option for most people. That's why I wanted to cover that in this video today, to help educate you with the differences, so that you can figure out what's the best for you. What are the benefits of the line of credit, versus, the cash out? Well, let's say that maybe, the line of credit, is something small for you. It's like $20,000, and you're getting a $20,000  year in bonus. You know you're gonna pay it off, in full, let's say within a few months or maybe a year, but, you don't wanna miss the opportunity. I don't know what it was for, it could be buying a car, or send your kid to college or whatever, but you don't wanna pull money maybe out of retirement, or something, or pay taxes and penalties. And you need $20,000 that you know you can pay back really quickly, well a line of credit, generally, it's a hundred bucks or less as far as costs. It is practically free from that standpoint. And it's great for something that's really short term, if that's your situation. That could be one benefit of a line of credit. 

Another benefit of a line of credit is for someone who owns their home free and clear, and maybe they want to use that line of credit, to borrow someone else's money for 30 days and then pay it back versus taking money out of their accounts. That could be another example. If you own your home free and clear, a home equity line of credit, might be great because you just want it, for an emergency or rainy day, you don't use it and it just kinda sits there. That would be another example. There are many examples, where a home equity line of credit is good, but make sure you list out your pros and cons, and you know what you're getting. 

Let's compare that to the benefits of a cash-out refinance, versus the home equity line of credit. Well, I am gonna say the biggest benefit is a fixed rate, a fixed term, likely no prepayment penalty, likely no balloon, no adjustments, and it's a principal interest payment, not an interest only payment. That's what I would think would be the benefits of the cash-out refund payments. Okay, the fifth thing I wanted to talk to you about today, and I want to throw you a curveball. Maybe you're watching this video, and doing your research, kudos to you. But maybe you're watching this video, because you were considering renovating your home, and you were thinking, maybe I need a cash-out refinance, maybe I need a home equity line of credit. Well, if you're watching this video, because you are looking for options with regard to renovating your property, I’m gonna throw you a big fat curveball, there's another option. And it might be way, way better. And most people don't know about it. If you call and ask for a cash-out refinance, you might not qualify for that. If the purpose is, for renovations, there might be another option that you actually do qualify for, that would get you a better rate and better options than a cash-out refinance, that most people don't know about. So guess what I'm gonna do, I'm gonna make a video on that, and I'm gonna leave you hanging. I want you to come back, watch the other video, DM me, if you want more information, let's stay tuned. So you can find out about the curveball, which has that amazing option, that's out there, most people don't know about, when it comes to renovating your property. 

Thank you, thank you, thank you, for tuning in guys. 

I'm gonna drop the link in the comments, in the comment section below, to a free copy of my book, Mortgage Piece, for even more information, than we've covered today in this video. 

Drop me a comment below, a comment, you know, down there in the comments section, type WIN, W-I-N in all caps if you now feel better, about making the best educated decision, for your choice, between these two options of mortgage financing. 

I hope you enjoyed the video today. If you did please, thumbs up, the likes are huge. It helps me to get exposure to other people, and help more people with the mortgage education process. So give me a like, and please subscribe to the channel, if you haven't already. Reminder I drop new videos every Tuesday and Saturday, and I'd love to connect with you on social. 

My Insta is _therealstephanieweeks. Website is stephanieweeks.com. Thanks guys. And girls.

September 18, 2020
Mortgage Refinance