HELOCs vs. cash-out refinancing: Which is safer now?
For tens of millions of Americans, their home is their most prized possession — and their most critical financial asset. That's why borrowing from it via home equity needs to be approached both carefully and strategically. In some cases, it's worth skipping altogether when interest rates on credit cards and personal loans, for example, are low. But, unfortunately, that's not what's available in the current interest rate climate, with credit card interest rates just surging past a record 23% (on average) and personal loans coming in just under a median 13% rate. Against this backdrop, then, home equity borrowing becomes the clear, cheapest alternative.
Two of the more popular ways to do so involve home equity lines of credit (HELOCs) and cash-out refinancing. The former allows homeowners to access their equity (averaging close to $330,000 right now) via a line of credit that works similarly to credit cards. The latter involves homeowners applying for a loan amount larger than their current loan balance. They then use the new loan to pay off the old loan and keep the difference as cash for their needs.
But in today's unique economic climate, it's critical to determine which of these is the safer choice. That's what we'll discuss below.
See how low of a HELOC interest rate you'd qualify for here now.
HELOCs vs. cash-out refinancing: Which is safer now?
Each homeowner's financial situation differs. That said, there's a strong argument to be made that a HELOC is safer than cash-out refinancing now. Here's why:
HELOCs won't require you to change your mortgage rate
Sure, HELOC rates averaging 8.61% are more expensive than the average mortgage refinance rate now (6.93% for a 30-year refinance loan). But HELOCs won't require you to give up your existing mortgage rate to secure financing — and a cash-out refinance will. And if you have a mortgage rate in the 3% range now, that may mean more than doubling it, easily negating any benefits you may obtain from accessing the funds. HELOCs won't require that trade-off, however, arguably making them safer for homeowners.
Review your HELOC eligibility requirements online today.
HELOCs could soon become cheaper
HELOC interest rates have been on a downward slope all year long and are down by around 1.5 percentage points from where they began in January 2024. And they could continue to fall in the months ahead if inflation remains steady and additional Fed rate cuts are issued. This could result in HELOCs becoming even cheaper in the future as rates on this product are variable and subject to change each month. The mortgage refinance rate you secure now, however, will remain the same until refinanced again in the future, starting the process all over again (not to mention the expense of additional closing costs).
HELOCs require interest-only payments
A new mortgage loan will require new mortgage payments immediately upon closing (and often during the closing process). HELOCs will not, however, as borrowers will only be required to make interest-only payments during the draw period. And if you don't use the funds you were approved for, you won't need to pay anything.
Additionally, you'll only have to pay interest on the amount of the credit line utilized — not for the full line of credit you were approved for. These are major advantages, particularly for those borrowers who may be limited in their ability to make larger payments back to the lender as they would need to do with a cash-out refi.
The bottom line
The decision to borrow from your home equity is a personal one that needs to be approached carefully. Since the home is collateral, you could lose it if you fail to repay what you've deducted. That's why it's so important to closely compare HELOCs and cash-out refinance offers to determine which is appropriate for your financial needs. By considering the above factors now, in today's unique economy, you'll be better able to choose between the two and better position yourself for financial success going into the new year.
