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VA Cash-Out Refinance vs Home Equity Line of Credit (HELOC)

Are you looking for a way to leverage your growing home equity? Let’s look at how these two methods differ.

Published on July 12, 2021

HELOCs — or home equity lines of credit — are often mentioned in the same context as cash-out refinances. But while both allow you to tap your home equity — the portion of your home you actually own, the two financing options aren’t one and the same.

What is the difference between a VA cash-out refinance and home equity lines of credit?

When comparing a HELOC vs refinance, there are lots of differences to think about. At the highest level, cash-out refinances give you a lump sum, while HELOCs let you pull out money as needed. HELOCs also come with adjustable interest rates, which means your monthly payments can fluctuate.

Another key difference is how these loans are repaid. While a cash-out refinance replaces your existing mortgage loan (meaning you’ll continue to make just one monthly payment), a HELOC adds a second monthly payment in addition to your existing mortgage.

What is a VA Cash-Out Refinance?

A VA cash-out refinance allows you to replace your existing mortgage loan, while also taking money out. It also may allow you to get a lower interest rate.

Because a VA cash-out refinance replaces your old mortgage loan, you’ll continue to have just one single monthly payment after refinancing. HELOCs, on the other hand, are a loan in addition to your existing mortgage. This means you’ll have two monthly payments once all is said and done.

How do VA Cash-Out Refinances Work?

A VA cash-out refinance works like this: You apply for a VA loan that’s larger than your current balance. Once approved, the new loan is used to pay off your old one, and you receive the remaining money in cash. You can then use those funds toward home improvements or whatever other expenses you might have.

How Much are Cash-Out Refinance Closing Costs?

Closing costs on VA loans — including cash-out refinances — generally clock in between 3% and 6% of the total loan balance. These vary widely by loan and lender, though, and your location can play a role as well. VA borrowers also must pay what’s called a funding fee on these loans, which run from 2.3% to 3.6% of the loan amount.

What is the maximum loan-to-value on a VA cash-out refinance?

VA loans allow up to 100% financing, so technically, you can take a loan out for as much as your home is worth. If your home is worth $250,000, for example, you could apply for a VA cash-out refinancing worth $250,000. Keep in mind that this value must be confirmed by an appraisal in many cases.

What is a Home Equity Line of Credit (HELOC)?

Home Equity Lines of Credit — or HELOCs — let you withdraw money from your home equity over a certain period of time. Unlike cash-out refinances, which come in both fixed- and variable-rate options, HELOCs almost always have adjustable interest rates. This can make them inconsistent and hard to budget for.

At the beginning of a HELOC, you typically make interest-only payments, helping keep your costs low. But once that period ends (usually after a decade or so), you’ll begin making larger monthly payments. All HELOC payments are in addition to your existing mortgage payment; a HELOC does not replace your current mortgage loan.

How do HELOCs work?

HELOCs work much like credit cards. You have a set credit line (based on your home equity) that you can withdraw money from as needed. This money can be withdrawn throughout the draw period, which usually lasts at least 10 years. Once that time period ends, you enter the repayment period. This is when you’ll start making larger monthly payments to pay down your loan balance.

Let’s look at an example: Say you apply — and are approved — for a $50,000 home equity line of credit. The draw period is 10 years, allowing you to pull out cash for your roof repairs this year, your daughter’s college tuition in three years, and those medical bills you get hit with nine years down the road. While withdrawing these funds, you’ll make monthly payments — but only for the interest on what you’ve withdrawn.

When that 10 year period is up, you’ll no longer be able to withdraw money and will need to make larger monthly payments to repay your loan. Repayment periods often last for around 20 years.

Pros of a HELOC

  • You can withdraw money as needed for an extended period of time.
  • You get low monthly payments upfront, making the loan more affordable in the beginning.
  • You can use the funds for anything.
  • You can borrow only what you need, keeping your interest costs to a minimum.

Cons of a HELOC

  • They put your home at risk of foreclosure if you can’t make your payments.
  • They usually come with adjustable interest rates, which can make your payment hard to budget and plan for.
  • Because they come with a long draw period and credit line, it can be tempting to overspend.

How much are HELOC closing costs?

HELOCs come with closing costs like most other loan products. On average, you can expect to pay anywhere from 2% to 5% of your total credit line, though this varies by lender. Some companies offer no-fee HELOCs but remember: The costs are likely baked in elsewhere (usually in the form of a higher interest rate).

Which Is Better for Me: Cash-Out Refinance or HELOC?

When you’re considering a cash-out refinance vs HELOC, the best option really depends on your unique situation — what your current mortgage rate is, the amount of equity you have in your home, and what you need the money for, among other factors.

Generally speaking, a HELOC is best if you’re not sure how much you need, you want access to cash for an extended period of time, or you’re not interested in replacing your current mortgage loan’s rate or terms. If you have a set amount of costs you’re trying to cover, you’re consolidating debts, or you could benefit from replacing your existing mortgage loan with a new one, a cash-out refinance may be best for you.

Here’s a good look at both options and when each may make sense:

When to Use a VA Cash-Out Refinance

  • You’re looking to cover a set amount of costs.
  • Interest rates have lowered and you’d like to replace your existing mortgage.
  • You’d prefer to make one monthly payment.
  • You’re consolidating high-interest debts, like credit cards and personal loans
  • A lump-sum payment makes the most sense.

When to Use a Home Equity Line of Credit (HELOC)

  • You’re not sure how much money you need, or you have open-ended expenses.
  • You need smaller monthly payments at the beginning of your loan term.
  • It is more ideal to keep your existing mortgage, as it has a low rate or favorable terms.
  • You can handle two monthly loan payments.
  • You want to draw on your funds as needed.

Ultimately, the best move will depend on your specific situation, so talk to an expert if you’re not sure which path is best.

HELOC vs Home Equity Loan

HELOCs are often confused with home equity loans, but the two are quite different. With a HELOC, you have a credit line to draw from as needed. A home equity loan, on the other hand, offers a lump-sum payment.

Home equity loans are also second mortgages, so they come with a full monthly payment right off the bat (not just interest costs). You’ll need to be sure you can afford both your home equity loan payment and your mortgage payment before taking one out.

Does the VA Back HELOC loans?

The VA does not insure home equity lines of credit, so if you’d like to apply for one of these, you’ll need to look to a non-VA lender or bank to get the ball rolling.

The VA does, however, offer cash-out refinancing. If you want an affordable way to tap your home equity, Veterans United and the VA Mortgage Center can help you apply for your cash-out refinance today.

Are HELOCs a bad idea?

HELOCs aren’t a bad idea if you know what you’re getting into. As long as you’re prepared to make the monthly payments (in addition to your existing mortgage payment) and you have a tight rein on your spending habits, HELOCs can be a very useful financial tool. On the other hand, cash-out refinances are great if you want to keep just one monthly payment and if you have a good handle on the expenses you need to cover.

What other options do I have to tap my home equity?

HELOCs and cash-out refinances aren’t the only way to leverage your home equity. You can also consider a home equity loan or look into equity sharing arrangements. These allow you to sell off a portion of your equity in exchange for a lump-sum payment.

What if I’m not sure which is best?

If you’re not sure whether to use a HELOC, cash-out refinance, or any other type of mortgage product, reach out to a home loan specialist for guidance. They can walk you through your options as a Veteran or military member and help you home in on the most affordable and appropriate product for your unique situation.

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Veterans United Home Loans is a VA approved lender; Mortgage Research Center, LLC – NMLS #1907 (www.nmlsconsumeraccess.org). Not affiliated with the Dept. of Veterans Affairs or any government agency. Not available in NV. 1400 Veterans United Dr., Columbia, MO 65203. Equal Housing Lender