Back in September 2024, the Federal Reserve finally began to lower interest rates and continued the cuts at its November and December meetings. HELOC rates have fallen in response. In fact, borrowing against your home’s value hasn’t been this affordable in about a year. People are paying attention. Mortgage holders collectively withdrew about $48 billion of their home equity in the third quarter of 2024 — the largest sum in two years.
Ways to tap your home’s equity
There are three main ways to access equity and turn it into cash: home equity lines of credit (HELOCs), home equity loans, and cash-out refinance. All are home-secured debts — that is, they’re backed by an asset (namely, your residence). All can be good sources if you need significant sums: a five-figure amount, at least.
The cash-out refinance is essentially a mortgage with benefits. You’d replace your current mortgage with it. The other two are loans that you could take out in addition to your primary mortgage.
HELOCs: overview
A HELOC is a revolving, open line of credit at your disposal, which functions much like a credit card — you can use it as needed, repaying and then borrowing again. However, a HELOC has some benefits over credit cards. HELOCs generally have a variable interest rate and an initial draw period, which can last as long as 10 years. During that time, you can take out funds and make interest-only payments. Once the initial draw period ends, there’s a repayment period, during which interest and principal are repaid for 10 to 20 more years. With a line of credit, however, it can be easy to get in over your head, using more money than you really need to use or are prepared to pay back. The changes in payment amounts can also be challenging to keep up with.
When should I choose a HELOC?
Home equity loans: overview
A home equity loan allows you to borrow funds in a lump sum. The money is repaid over a set period typically ranging from five to 30 years, at a fixed interest rate.
However, you typically end up paying a higher interest rate for a home equity loan than for a mortgage. This is essentially a second mortgage.
When should I choose a home equity loan?
Cash-out refinance: overview
A cash out refinance is an entirely new loan that replaces your existing mortgage with a larger one. You receive the difference in a lump sum of cash when the new loan closes.
The cash-out refinance is essentially a mortgage with benefits: You’d replace your current mortgage with it. In contrast, home equity loans and HELOCs are debts in addition to your primary mortgage. A major downside, however: If rates have increased since you took out your original mortgage, you could pay more interest over the life of the loan.
When should I choose a cash-out refinance?