Refinance vs. HELOC
Should I take cash out by refinancing my first mortgage, or just take cash out with a HELOC?
I am asked this question frequently. There are many factors to consider. The answer depends on how much cash you want to take out, what the current interest rate is on your first mortgage, and what the fees are if you refinance. Simple calculations comparing the costs and savings can show you in black and white which is cost effective.
However, there are two more factors that are subjective.
A HELOC has an adjustable rate usually tied to the prime rate. You may be the type of person who do not want to risk higher payments if the interest rate should go up. I have many clients like that. They want the security of a fixed rate so they know exactly what their payments will be for the next 30 years. They do not want to take a risk. In this case, a HELOC is not for you. Refinance and get a fixed rate, or take out a home equity fixed rate second.
The other factor to consider is whether you think you can pay off the HELOC in a short amount of time. For example, let’s say you are expecting a sum of money, such as a bonus, or a raise. But you need to pay the tuition for college today. You don’t want to refinance the house because that loan and higher payments will be with you for 30 years (or whatever is the term of the loan). With a HELOC, you can take out the money you need and make monthly interest payments on it. When your bonus comes in, pay off the HELOC balance, and, poof, that extra monthly payment disappears.