What are HELOCS, HELOANS, and cash out refinance loans?

Looking to access your home equity without touching your first mortgage rate? In today’s market, you have options like HELOCs, HELOANs, and cash-out refinance loans. Here’s what you need to know to make the right choice for your financial goals.

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

A HELOC is a revolving line of credit that allows you to borrow against your home equity. Unlike a traditional loan, you can draw funds as needed during the draw period (usually 5-10 years) and repay over a longer term.

‍Key Features of HELOCs:

• Variable interest rates (often tied to the Prime Rate).
• Flexible access to funds.
• Shorter draw periods in today’s market (3-5 years).

Pro Tip: Be aware that you may need to refinance your HELOC if you want to extend the draw period.

What is a HELOAN (Home Equity Loan)?

A HELOAN is a fixed-rate, second mortgage that provides a lump sum of cash. It’s ideal for homeowners who prefer predictable monthly payments.

Key Features of HELOANs:

• Fixed interest rates.
• Terms ranging from 10 to 30 years.
• No flexibility to draw additional funds after the initial loan.

‍Pro Tip: HELOANs are great for one-time expenses like home renovations or debt consolidation.

What is a Cash-Out Refinance Loan?

A cash-out refinance replaces your existing mortgage with a new, larger loan. The difference between the two loans is paid out to you in cash.

Key Features of Cash-Out Refinance:

• Fixed or adjustable interest rates.
• Longer repayment terms (typically 15-30 years).
• No second mortgage required.

‍Pro Tip: Cash-out refinancing is a good option if you can secure a lower interest rate than your current mortgage.

Fixed HELOC: A New Option in Today’s Market

Yes, fixed HELOCs now exist! These combine the flexibility of a HELOC with the stability of a fixed interest rate.

How It Works:

• The interest rate is fixed based on the draw amount and the Prime Rate plus a margin.
• Ideal if you expect interest rates to rise in the future.

Pro Tip: Fixed HELOCs may not be the best choice if the Federal Reserve lowers rates.

HELOC vs HELOAN vs Cash-Out Refinance: Which is Right for You?

Every homeowner’s situation is unique. Here’s how to decide:

• HELOC: Best for ongoing expenses or flexible access to funds.
• HELOAN: Ideal for one-time expenses with predictable payments.
• Cash-Out Refinance: Great for consolidating high-interest debt or funding major projects.

‍Pro Tip: Consult a mortgage professional to evaluate your finances, credit score, and long-term goals.

Will Mortgage Rates Go Down in 2025?

While mortgage rates may decrease slightly, don’t expect a return to the historic lows of 2.875%. The new normal could be in the 5.5% to 6.875% range until economic conditions improve.

Frequently Asked Questions (FAQs)

What is the difference between a HELOC and a HELOAN?

‍A HELOC is a revolving line of credit, while a HELOAN is a fixed-rate, lump-sum loan.

‍Can I get a HELOC with bad credit?‍

It’s possible, but you may need to explore alternatives like a cash-out refinance.

Is a cash-out refinance better than a HELOC?‍

It depends on your financial goals and current mortgage rate.

Ready to Access Your Home Equity?

Speak to a Midwest mortgage expert today to explore your options for a HELOC, HELOAN, or cash-out refinance. Get a free, no-obligation quote and take the first step toward achieving your financial goals.