HELOC vs refinancing: Which option makes sense for you?

When you need cash and you own a home, you’ve likely got options. Two common ways to tap into your home equity are getting a HELOC or refinancing your mortgage.

HELOCs and refinancing loans both rely on your home equity, but they work differently. A HELOC is a revolving line of credit tied to your home, while refinancing replaces your existing mortgage with a new loan. 

The better option depends on how much cash you need, how long you need it for, and your current mortgage rate.

HELOC vs refinance: What’s the difference?

The main difference between a HELOC and refinancing is the structure. A home equity line of credit is a second mortgage that you can use to borrow, repay, and borrow again, while keeping your original mortgage. Refinancing replaces your current mortgage with a new one, typically with a different rate, term, and monthly payment.

If you want to borrow against your home equity and refinance your mortgage, you could get a cash-out refinance. You borrow more than you owe on your mortgage, and receive the difference in cash.

What is a HELOC?

A home equity line of credit (HELOC) is a line of credit you can borrow from over time. You're approved for a maximum credit limit based on your home equity, income, and credit profile. During the draw period, which typically lasts five to 10 years, you can borrow, repay some or all of that balance, and borrow again up to your credit limit, over and over.

Some lenders only require interest payments in the draw period, and so the balance you owe stays the same. How a HELOC works depends in part on the lender. With a HELOC through Achieve Loans, you pay full principal plus interest during the draw period and the repayment period.

After the draw period, the repayment period begins. You can’t borrow more during the repayment period, and you pay both principal and interest for the rest of the loan term. HELOCs typically have variable interest rates, so your payment could go up or down based on market conditions. HELOCs through Achieve Loans have a fixed interest rate. 

There are also typically upfront fees, with HELOC closing costs generally ranging from 2% to 5% of the loan amount.

A HELOC could work well if you want to borrow against your home without changing anything about your mortgage. For example, if you have a low mortgage rate, you may want to hang on to that. Instead of refinancing, you could get a HELOC and keep your mortgage intact.

What are refinancing and cash-out refinancing?

Refinancing means taking out a new mortgage to replace your current one. There are two main types:

• Rate-and-term refinancing just changes your interest rate or loan term. You borrow enough to pay off your current mortgage, but you don't borrow more.

• With cash-out refinancing, you borrow enough to cover your current mortgage plus more depending on your home equity. You get the extra as cash.

In a cash-out refinance, you receive a lump sum of cash at closing. Your new monthly mortgage payment reflects the higher loan amount. Cash-out refinances typically have a fixed interest rate, though some are variable or adjustable.

Both types of refinances have closing costs, generally ranging from 2% to 5% of the loan amount.

HELOC vs refinancing: Side-by-side comparison

Which option costs less over time?

Neither option is always cheaper than the other. The cost depends on several factors, including how you use the loan and the current market.

If you borrow from a HELOC multiple times, it could cost you more than a cash-out refinance would have (since that’s a one-time loan). The flexibility of a HELOC has its advantages, but it could also lead to borrowing more overall.

A cash-out refinance could be more expensive if interest rates are higher. If you took out a mortgage years ago at a low fixed interest rate, you may get a much higher rate by refinancing today. A HELOC could cost less in this situation, because you could keep the low interest rate on your original mortgage and only pay the higher rate on the amount you borrow with the HELOC.

When a HELOC makes more sense vs when refinancing does

A HELOC may be the better choice if:

• You want to keep your current mortgage rate.

• You need flexible access to cash over time.

• You’re close to paying off your mortgage (refinancing typically starts you over on a new 15- or 30-year mortgage loan).

Refinancing may be the better choice if:

• You're already planning to refinance for a lower rate or shorter term.

• You prefer a one-time loan over a revolving line of credit.

• You’d rather stick to a single mortgage payment instead of adding a HELOC and another monthly payment to the mix.

If you’ve decided a HELOC is the better fit, a HELOC through Achieve Loans allows you to lock in a fixed rate. You could get the flexibility of a HELOC with the peace of mind that comes from knowing the rate won’t change. To get started, check your rate with no credit impact.