What's the difference between a cash-out refinance and a HELOC?

Hi, this is Jason Skelton with Pacific National Lending.

Welcome to another Q&A session where I answer mortgage questions from you all on the internet.

Today's question is:

"What's the difference between a cash-out refinance and a HELOC?"

Summary:

Jason draws a clear line between the two products. A cash-out refinance replaces the existing mortgage and pulls additional funds out in the process, which makes the most sense when current rates are better than the rate on the existing first mortgage — in that case the borrower may lower their rate, take cash out, and still likely reduce their payment. A HELOC, by contrast, functions almost like a credit card attached to the home. It is a second mortgage providing access to funds the borrower can draw against, with interest owed only on what is actually borrowed while it is borrowed, and the ability to repay and re-borrow repeatedly. Which one fits depends on the borrower's needs and reason for borrowing.

Answer:

A cash-out refinance usually involves refinancing the mortgage that you have in place already and then pulling additional funds out. That really makes sense if the rates are better than what you have on your first, because then a lot of times we can drop your rate on your first, pull a little bit of money out, and likely still lower your payment. A home equity line of credit is almost like a credit card attached to your home. It's a second mortgage that gives you access to money that you can borrow. There are a lot of benefits to home equity lines of credit as well, because you only pay interest on the money that you borrow while you borrow it. And you can pay it back and borrow it back over and over and over again. So depending on what your needs are for the money and why you're borrowing it, sometimes a home equity line of credit makes more sense than a cash-out refinance, and vice versa.