HELOC vs Cash Out in Rising Rate Market
A well-done article (Cashing out has some advantages) appearing in the Boston Globe compares “cashout” refinancing vs HELOCs as tools for raising cash.
According to the article, the main advantage that cashouts have at the moment is lower rates and the anticipation that the variable rate on most HELOCs will continue to go up:
A key reason for the trend: Fixed-rate cashout-refinance mortgages are looking pretty smart when compared to floating-rate home-equity lines of credit (or HELOCs).
A year ago, some HELOCs had introductory rates of less than 4 percent.
But the Federal Reserve�s steady increase in short-term interest rates has affected HELOCs much more than long-term fixed mortgage rates.
Today, a typical prime-plus-one HELOC (which charges the prime rate plus 1 percent) starts at about 8 percent.
By contrast, a well-qualified homeowner can get a fixed-rate 30-year cashout-refinance mortgage for about 6.25 percent, or a 15-year loan in the 5.875 percent range.
Cashout refinancings also have another selling point right now: Borrowing money today at a 6 percent rate guaranteed for 30 years might look like a brilliant move in a year or two.
That�s because long-term mortgage rates appear on track to slowly but steadily rise over the next few years.
But even at higher rates, HELOCs have one big advantage that fixed rate loans can’t match -flexibility:
To be fair, there are still good reasons to consider a HELOC instead of a cashout refi.
At the top of the list: Convenience and control.
For openers, once the bank approves you for a specific credit line (say, $100,000), you decide when to tap into some - or all - of the money.
You�ll only owe interest on the money you actually use, not the full amount of your approved credit line.
So, a $100,000 HELOC is often better than getting $100,000 lump sum through a cashout refi.
If you only need $20,000 of the $100,000 right now, that’s all you’ll have to pay interest on.Consider the remaining $80,000 of available credit as a cost-free contingency fund - ready for access whenever you need it.
True, your monthly rate on your $20,000 loan might be 8 percent. But the rate on your $80,000 of contingency money is 0 percent until you actually spent it.
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