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MORTGAGE KNOWLEDGE CENTER

PenFed Mortgage with Confidence

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image

HELOC LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

  1. Home
  2. Mortgage Knowledge Center
  3. HELOC or Refinance?

MORTGAGE

HELOC or Refinance?

What you'll learn: HELOC Basics, Cash-Out Refinancing, Decision Factors, Financial Strategy

EXPECTED READ TIME:8 MINUTES

August 9, 2023

HELOC or Refinance?
 

Whether you’re a seasoned homeowner or a prospective homebuyer, you're likely aware that a home is more than just a place of residence. It's a substantial investment, a tangible asset that, over time, appreciates in value. This value, or equity, can be a potent financial instrument when leveraged judiciously. Two popular methods homeowners use to access this equity are through a Home Equity Line of Credit (HELOC) and cash-out refinancing.

While both a HELOC and cash-out refinancing allow you to tap into your home's equity, they do so in fundamentally different ways – each with its own set of advantages and potential pitfalls. Understanding these differences is key to making an informed decision that aligns with your financial goals and circumstances.

HELOC: The Flexible Friend

A HELOC operates much like a credit card. Your lender sets a credit limit based on the equity in your home, and you can borrow up to that limit as needed. This flexibility can be particularly beneficial for those with ongoing expenses or those who prefer to have a financial safety net for unexpected costs.

For instance, a HELOC can provide the necessary funds quickly and conveniently for:

  • Emergency Funds: A HELOC can serve as a financial safety net, providing funds for unexpected expenses. Unlike other forms of credit, a HELOC uses your home as collateral, often resulting in lower interest rates.
  • Home Improvements: A HELOC allows you to draw funds as needed, rather than taking out a lump sum. This can be particularly useful for home improvement projects that are carried out in stages.
  • Education Expenses: With the rising cost of education, a HELOC can be a viable option to fund college tuition or other educational expenses.

However, the flexibility of a HELOC comes with a degree of risk. The interest rates on a HELOC are typically variable, meaning they can increase over time. Additionally, the easy access to funds can lead to overspending, potentially resulting in a larger debt load than initially intended.

Cash-Out Refinance: The Consolidation Champion

Cash-out refinancing, on the other hand, involves replacing your existing mortgage with a new one for a larger amount. The difference between the old and new mortgage is given to you in cash. This can be an effective strategy for those looking to consolidate high-interest debt or funding a significant one-time expense such as a second home or business venture.

However, cash-out refinancing also has its share of potential drawbacks. Refinancing often involves closing costs, which can be substantial. Additionally, by increasing the size of your mortgage, you may be extending the period of your debt, potentially resulting in more interest paid over time.

HELOC vs. Cash-Out Refinance: The Decision

When deciding between a HELOC versus cash-out refinance, it's important to consider your financial situation and goals. If you need a flexible source of funds for ongoing expenses or emergencies, a HELOC may be the better option. However, if you're looking to consolidate debt or make a large one-time purchase, cash-out refinancing could be more beneficial.

Remember, it's essential to consider the potential risks and benefits of each option. Consult with a financial advisor to ensure you're making the best decision for your unique situation.

In summary, both HELOCs and cash-out refinancing offer ways to tap into your home's equity. The right choice depends on your individual needs, financial health, and long-term goals. Whether you choose a HELOC or cash-out refinance, make sure it aligns with your financial strategy and contributes positively to your financial future.

The Bottom Line

Choosing between a HELOC and cash-out refinance is a significant decision that can impact your financial health. It's crucial to understand the pros and cons of each option and how they align with your financial goals.

While a HELOC offers flexibility and easy access to funds, it also comes with the risk of overspending and variable interest rates. On the other hand, cash-out refinancing can provide a large sum of money for significant expenses or investments, but it also comes with potential drawbacks like closing costs and a longer repayment period.

Ultimately, the decision between a HELOC vs. cash-out refinance should be made with careful consideration of your current financial situation, future financial goals, and comfort with the level of risk involved. It's always a good idea to consult with a financial advisor or mortgage professional to help guide you through this decision.

Navigating Your Financial Future

Homeownership comes with many financial advantages, one of which is the ability to tap into your home's equity when you need funds. Whether you choose a HELOC or cash-out refinance, it's important to use these tools responsibly and strategically. By understanding the pros and cons of each option, you can make an informed decision that supports your financial well-being both now and in the future.

In the end, the choice between a HELOC vs. cash-out refinance is not solely about numbers: It's about understanding your financial needs, assessing your risk tolerance, and making a decision that leverages your equity as an ally with your long-term financial goals. By doing so, you can unlock the value of your home and use it to build a secure and prosperous financial future.

For more information about PenFed Mortgages:
 

PenFed Mortgage: 

800-970-7766

Get Started

SIMILAR ARTICLES

Is a Cash-Out Refinance a Smart Financial Move?

Considering a cash-out refi on a home that’s paid off? Find out what the pros and cons are and some of the smartest ways to use your refinance funds.

Hands holding house and change

Advantages of Cash-Out Refinances for Home Improvements

For many homeowners, a cash-out refinance is the best way to pay for home improvements. Discover how to finance your renovations & home improvements.

a woman painting her interior home wall blue

HELOC vs. Cash Out Refi – Which Is Right For You?

Home Equity Line of Credit (HELOC), lets you withdraw funds as needed. Cash-out refi gives you funds all at once. Find out which is better for your situation.

couple getting financial advice

What is a HELOC?

Wondering what exactly a home equity line of credit is? Here's a closer look at what homeowners should know about taking out a HELOC.

couple looking at tablet
image

HELOC LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Home Buying Steps

  • Getting Started
  • Finding a Home
  • Getting a Mortgage
  • Home Ownership

Mortgage Topics

  • VA Loans
  • Conventional Loans
  • First Time Homebuyer
  • Home Equity
  • Homebuying 101
  • Checklists
  • Adjustable Rate Mortgages
  • PenFed Top 10
  • Refinance
  • Jumbo Loans
  • FHA
  • Videos

Mortgage Products

  • Mortgage Center
  • Refinancing
  • Home Equity

PenFed HELOC

Rates as Low as % APR* with flexible use of funds

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Disclosures

1Prime Rate is % as of . The APR for this Home Equity Line of Credit (HELOC) is based on prime plus a margin and can change monthly. Fixed Rate Advances will be amortized over the Fixed Rate Advance Term, with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin, and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes.

  • Annual Fee: Notwithstanding the foregoing, an annual fee of $99 will be assessed on each account anniversary.
  • Home equity lines of credit (HELOC) are variable rate loans and the interest rate is subject to increase after consummation of the loan on monthly basis. Closing costs range between $500 and $8,500 for credit lines of $500,000. Contact a representative for additional details.

Appraisals: PenFed will attempt to establish value via an independent method. If that method is unsuccessful, or the value is not sufficient for the amount requested, an appraisal will be required regardless of CLTV. An appraisal is always required in the following circumstances:

For all loans with a loan amount greater than $400,000.

If an appraisal is required, it must be ordered by PenFed. You will be contacted for authorization and payment prior to ordering. Appraisal fees average $550 to $850 (some run higher).

  • Closing Cost Credit: PenFed will pay most closing costs associated with a home equity line of credit (HELOC), which includes credit report, flood certification, settlement/closing, property ownership and encumbrances search, recording, property search, and quick close. Member is responsible for any city, county, and/or state taxes if the subject property is located in FL, LA, MD, MN, NY, TN, or VA. If an appraisal is required, the member, who is responsible for the fee whether or not the loan closes, will pay the cost.

Interest may be tax deductible, consult a tax advisor for further information regarding the tax deductibility of interest and charges.

Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Advance Period. During your Advance Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.

Fixed Rate Advances will be amortized over the Fixed Rate Advance Term with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes and 4.75% for investment properties.

Property Insurance: Property insurance is required.

Multiple PenFed Loans: Multiple PenFed Equity loans and HELOCs are available as long as the member and collateral qualify (except Texas). For Equity loans and HELOCs the total indebtedness cannot exceed $500,000 for all PenFed Equity and HELOCs combined.

PenFed does not lend on:

  • Mobile homes
  • Co-ops or time-shares
  • Properties that are currently listed on the market for sale
  • Commercial property or property used for commercial purposes, even if a residence is part of the property
  • Undeveloped property (land only)
  • Properties with more than 4 units

Properties that are currently under major construction/renovations: Property must be fully livable, with no safety issues. (Examples: no missing rails from stairs/decks, no open walls with wires showing, missing kitchen appliances/counters, missing bath fixtures or unfinished pool).

  • Additional limitations may apply

Home Equity Line of Credit:

  • This Account has a Draw Period of 10 years, followed by a repayment period of 20 years.
  • If only minimum payments are made during the draw period, the loan balance will not decrease.
  • In Texas, the maximum CLTV available is 80% on owner occupied properties. Additional restrictions apply in Texas, so please ask a representative for details.
  • In all other states, the maximum CLTV is 85% on owner occupied properties and second homes. Additional restrictions or requirements may apply based on application characteristics.
  • Property type of Condo has a maximum CLTV of 80%.
  • The maximum CLTV available is dependent on credit qualification.
  • Rates vary depending on owner occupancy and CLTV and other loan criteria.

Minimum Loan Amount Requirements in all States:

  • For an owner occupied property or second home the minimum loan amount is $25,000 and the maximum amount is $500,000 with a CLTV of 85% or less of the fair market value.

Other terms and conditions apply; call 844-918-4307 to speak with a representative for details. All rates and offers are subject to change without notice. To receive advertised product, you must become a member of PenFed.

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This credit union is federally insured by the National Credit Union Administration. Rates are current as of October 2023 unless otherwise noted and are subject to change.

APY = Annual Percentage Yield
APR = Annual Percentage Rate


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You are leaving PenFed.org and entering a third party Website that is not a part of Pentagon Federal Credit Union.


The content you are about to view is produced by a third party unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Realty, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Realty, LLC, see the Affiliate Business Arrangement Disclosure.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party Website.


The content you are about to view is produced by a third party website that is unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Title, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Title, LLC, see the Affiliate Business Arrangement Disclosure.


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