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MORTGAGE KNOWLEDGE CENTER

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HELOC LOANS

Rates starting at % (APR %)¹

 

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

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  1. Home
  2. Mortgage Knowledge Center
  3. HELOC vs. Cash Out Refi - Which is Right For You?

MORTGAGE

HELOC vs. Cash Out Refi - Which is Right For You?

What You'll Learn: What Type of Home Loan Financing is Best for Your Circumstances

EXPECTED READ TIME: 6 MINUTES

December 31, 2021

When you own a home, you have an asset you can draw on in a few different ways. Two of the most common are a cash-out refinance and a home equity line of credit (HELOC). Today we’ll discuss the ins and outs of these two different home loans and which one is right for your circumstances.

How to Borrow Money Against Your House

To borrow against your home, you’ll need to have equity. That’s the difference between the value of your home vs. how much you owe. Here’s an example:

  • $500,000 home value
  • $250,000 mortgage
  • 50% LTV

In the above scenario, you’d have enough equity to get a cash-out refinance or HELOC. You’ll want to stay under 80% loan to value (LTV), so you don’t have private mortgage insurance (PMI).

Getting any type of home loan consists of finding the right lender, discussing your options, filling out the application, supplying documentation, going through the loan process, and finally closing on the loan.

A cash-out refinance is similar to when you purchased your home and received your mortgage. This time, you’ll replace your current loan with a new one that has a larger balance. You’ll take the difference in cash at closing. A HELOC typically requires a bit less paperwork, but it depends on the lender.

Instead of refinancing your current mortgage, you can keep it and take out a home equity line of credit (HELOC). That’s an option especially if your current interest rate is low.

Advantages of Cash-Out Refinance vs. Line of Credit

With a cash-out refinance, you’ll have a new single mortgage. Your new loan pays off your current mortgage and gives you funds at closing. The advantage of a cash-out refi is that instead of having a mortgage and a separate line of credit, you only have one loan. That makes paying bills more manageable. Plus, the interest would most likely be lower than a HELOC. You can get a cash-out refi at a fixed or adjustable rate.

A HELOC is secured with your property — just like a regular mortgage. It usually comes in an adjustable interest rate, and often there’s a low introductory period. After that initial period, the interest rate can vary based on the market. With this type of home loan, you draw funds as you need them and pay interest on what you use. If you’re doing a home improvement project that will take months, a HELOC could be a great option because you don’t have to take out the funds all at once.

HELOC vs. Mortgage

Your home secures both a HELOC and mortgage. If you sell your home, you have to pay those loans off. You can also pay these loans down or off early.

With a HELOC, you have access to funds that you can use for anything you choose. For example, if you’ve wanted to do some home renovations, you can. Or, if you have a lot of high-interest credit cards or personal loans, you can pay them off.

A rate-and-term mortgage only finances your home. It doesn’t give you any money at closing. Often a borrower will get a new rate-and-term mortgage to refinance their current one for a lower interest rate and different term. Then once they’ve closed on that loan, they’ll get a HELOC for home improvements or other things they want to pay for.

HELOC vs. Cash-Out Refi

If you get a cash-out refinance, you’ll be increasing the balance of your home loan. That means it will probably take you longer to pay it off. That’s something to consider, especially if you’re getting cash out to pay off debts. The longer the term of your loan, the more interest you’ll end up paying. Compare your options by looking at an amortization schedule. Typically, a cash-out refinance has higher rates than a rate-and-term mortgage where you don’t take cash out.

Closing costs are generally less with a HELOC. If you’re using your HELOC for home improvements, save your receipts and check with your accountant to see if your HELOC interest is tax-deductible. Consult a tax adviser for further information regarding the deductibility of interest and charges.

HELOC vs. Personal Loan

Your home secures a HELOC. A personal loan is unsecured. Depending upon how much equity you have in your home, you may be able to borrow more with a HELOC. Personal loan limits vary by lender but range between $25,000 to $100,000

If you don’t want your property used as loan security, get a personal loan. Otherwise, a HELOC usually has lower interest.

When you’re comparing a HELOC vs. cash-out refi, it depends on your financial goals. Both have their advantages.

SIMILAR ARTICLES

Top 10 Advantages of HELOCs — Especially with a Credit Union

Discover why credit union HELOCs mortgages are incredible - from low credit union HELOC rates and low fees. Read on for more.
Advantages of HELOC

Top 10 Documents Needed for Mortgage

When you're applying for a mortgage, you'll be asked for a list of documents. Check out our mortgage loan documents checklist so you can be prepared.
Important Documents

Top Reasons for a Credit Union Refinance

Take advantage of low credit union to refinance rates, special promotions, a variety of products & convenience. Discover the advantages of credit union refinances.
Credit Union Refinance

Top 10 Home Improvements

Whether you want to add landscaping, new windows, or an addition to your house, find out what the top 10 home renovation projects are.
home improvements
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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 September 2023 unless otherwise noted and are subject to change.

APY = Annual Percentage Yield
APR = Annual Percentage Rate


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Routing #256078446

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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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