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Should You Use a HELOC or Mortgage Refinance for Home Remodeling?

July 30, 2021

Should You Use a HELOC or Mortgage Refinance for Home Remodeling?

If you’re like many homeowners, you spent your COVID-induced quarantine gazing at your four walls and deciding you need an upgrade. Whether you’re looking for a kitchen remodel to entertain friends and family you’ve missed or you’ve decided to convert a seldom-used living room into a home office, chances are good you need extra cash to make your dream a reality.

Fortunately there’s a great place to find that money—and that’s in your house itself. If you have equity in your home as many homeowners do—you have two strong options: a cash-out refinance or a home equity line of credit (HELOC).  Let’s look more closely at what these financing options are to see which one might be right for you.

What is a cash-out refinance?

If you have a lot of equity tied up in your home, which is your home has increased in value since you purchased it, you may want to tap some of it through a mortgage refinance. While a typical refinance might allow you to lower your monthly payment (always a worthy goal), a cash-out refinance will yield money to pay for that remodel.

Here’s how it works: Apply for a new loan which is higher than your existing mortgage, but less than your home’s value. You can use the money from the new loan and to pay off your original loan, leaving the rest of the cash to pay for your remodel. You’ll then continue to pay as usual on the new mortgage.

This can be a smart strategy, particularly if you are able to obtain a better interest rate than you had on your original mortgage. You also might qualify for a loan which better meets your needs, such as a shorter- or longer-term loan, or a fixed rate or adjustable rate, depending on your financial goals. Your mortgage advisor will help you walk through options, compare various payments and help you choose a loan that’s right for you.

What is a HELOC?

A HELOC is different from a loan where you are not taking out a lump sum of money. Instead this loan offers you a line of credit to tap as needed. You’ll only pay interest on the funds as you use them. This flexibility can be handy if you’re not sure exactly how much you’ll need for your home remodel. The funds are there to utilize when you need them, but you won’t be paying interest on the amount you aren’t using.

A line of credit is separate from your mortgage, but it is based on the equity you have in your home, which will serve as the collateral for the loan.

Is a Cash-Out Refinance or HELOC better for a home remodel?

Each of these financial products has its own pros and cons. Here are two other factors you should consider:

Your current interest rate: If rates have decreased since you first bought your home, you may benefit from a lower rate. Be sure to check and compare the current rates on both a new mortgage and a HELOC. Be assured that either option is liable to offer better interest rates than a credit card.

The costs: Both a refinance and a HELOC will come with fees, but those associated with a HELOC tend to be lower. While both products require a lender to determine the value of your home, since it’s being used as collateral. HELOCs tend to have low or no closing costs, although programs vary. Also look into prepayment or other penalties, just so you have a clear picture of the total costs. Ask your banker to give you a summary of all the fees so you can compare them and then build them into the total cost of the loan.

The bottom line is that both of these financing options are a worthy choices for a home remodel. Be sure to check out Valley Strong Credit Unions loan options today at