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HELOC Versus Home Refinancing: Which to Choose?

If you’re a little bit confused about the differences between opening a HELOC and refinancing your mortgage, you’re definitely not alone. Both are important financial tools that homeowners can use to get the most from the equity they've built up in their home — but each works a bit differently, offering its own particular benefits. Discover the features and benefits of each below, and decide which option is right for you.

What Is a HELOC?

Pronounced HEE-lock, the letters H-E-L-O-C stand for home equity line of credit. It’s a separate loan available as a revolving line of credit in addition to your mortgage. The reason it’s so closely associated with a primary mortgage is because the amount you can borrow—the line of credit—depends on the amount of equity you have accrued in your home’s current value versus what you still owe. The more equity you have in your home, the higher the limit can be on the line of credit associated with it. These offer a set of potential features for users:

Flexible Options: Because they function as an open line of credit, HELOCs offer a great deal of flexibility to homeowners. Just because you open the line of credit doesn’t mean you have to use the whole amount, and you usually don’t have to use any of it right away. For whatever you do use, you make monthly payments just like any other type of loan.

Pay Over Time: Since it works much like a credit card, you can pay off monthly balances or pay the balance down over time. You can make multiple purchases within a short timeframe or over the course of years—depending on the line of credit’s terms and draw period. Purchases are at your discretion as long as you remain within your account’s financial limit.

Variable, Potentially Lower Interest: Again, much like how you pay a credit card, you’ll be expected to make monthly payments of the portion of the line of credit that you do use, and any remaining balances will accrue interest. The rates of interest are usually lower than those on credit cards but are often variable unless the line of credit offers a fixed rate or term option. Some lines of credit may offer special introductory rates that change over time.

Emergency Security: Having a line of credit based on home equity can offer some security as an emergency fund. The amounts available are often healthy and the terms more favorable than those for regular credit cards or personal loans. Lines of credit can also offer flexibility and the ability to act if you want to make significant home improvements or need to complete expensive home repairs—like replacing your home’s heating and air-conditioning system, for example, or renovating living spaces. In some cases, it may even be a sound option for consolidating and paying off debt or financing tuition costs.

How Refinancing Compares

When you refinance your home, you’re actually renegotiating the terms and conditions of your mortgage. Refinancing will pay off and replace the loan you currently have on your home with a whole new one. Most often, homeowners refinance to obtain a more favorable interest rate, lower monthly payments, or either shorten or lengthen the term of the loan. 

For some, refinancing lets homeowners use the equity they’ve accrued in their homes while continuing to stay in and build more equity in their homes. In short, refinancing can make good financial sense for any number of reasons, but mostly because it gives you the option to save money each month to put towards other needs rather than exclusively borrowing. Some benefits include:

Affordability: A homeowner may have an adjustable-rate mortgage—also known as an ARM—that is due for an interest rate hike that will increase the monthly mortgage payment. Refinancing could be key in keeping monthly mortgage payments affordable.

Mobility: Plans can change. A homeowner may realize they don’t want to stay in a home long term after all and may want to take advantage of a lower interest rate on an ARM that will better serve the shorter time period.

Expediting Payoff: Refinancing to a shorter term—15 or 20 years, for example, versus 30—lets a homeowner pay off the home faster and might even come with a lower interest rate that keeps the monthly payment doable.

Optimize Interest: Current interest rates may be more favorable than what was available at the time of the prior mortgage. Rates may have fallen, or the homeowner’s financial situation and credit standing may have improved enough that a refinance could actually save money.

Home Updates: A homeowner may want to make improvements or repairs to the home. Refinancing may provide the financial room they need to maintain or even increase the value of their home.

You’ll notice that some of these benefits overlap those of the HELOC. It’s true that these two methods of financial flexibility help you access money based on an investment you’ve already made. In refinancing specifically, the lender will pay off your prior mortgage, and the new, refinanced mortgage will take its place. You’ll still have your monthly mortgage payment, but it will adhere to the terms and conditions of the new loan.

Home Equity Line of Credit or Refinance?

Either action—opening a HELOC or refinancing your mortgage—may come with closing costs, an appraisal and fees similar to those associated with a primary mortgage. The real question you have to ask yourself is if you’re comfortable with borrowing money against your home or you’d rather renegotiate your terms to free up money each month.

To ensure you’re getting the most buying power for your equity and the flexibility that you need, reach out to our lending specialists at La Capitol Federal Credit Union. We can show you how to make the most of your mortgage, your equity and your homeownership.


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