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HELOC vs Cash Out Mortgage Refinance, Which is Better?

March 26, 2024


According to recent data from WalletHub, the average American household credit card debt is $10,848. However, 1 in 5 has over $20,000 in credit debt. While $20,000 could be arbitrary, if there is too much month left at the end of your money, then it’s time to see if paying off credit card debt will improve cash flow.

What are the consequences of maxing out credit card balances or making late payments?

Of the many criteria on which our credit scores are computed, payment history and proportion of balances to credit limit play a large part. Having maxed-out credit cards and making a late payment will crater your score and prevent you from having any flexibility in borrowing, should you have a need-based circumstance for funds like a new car or home repair.

What are your options?

If you are like the millions of Americans struggling with credit card debt, one solution might be to consider how to best use the equity in your home to help. If you want to pull cash out of the equity of your home to pay off credit card debt, you will weigh the benefits of improving monthly cash flow against increasing mortgage rates. So, we will talk about which would be better: a HELOC or a Cash-out mortgage refinance (1st Mortgage).

2nd Mortgage with a HELOC

A HELOC, or a Home Equity Line of Credit, is a variable mortgage, usually a 2nd mortgage. Think of it like a credit card, only secured by your home. The rates are calculated as US Prime Lending Rate Money Rates (wsj.com) plus a margin of anywhere from 2%-4% added on to compute your interest rate.

As of today, the Prime Lending Rate is 8.25%, so a HELOC rate would be 10.25% to 12.25%.

• If your 1st mortgage rate is low, you don’t want to touch it; it makes great sense.
• HELOCs are flexible; they can help you buy things without needing to use credit cards.

• HELOCs have difficult qualification standards. Credit score requirements are high, and documentation standards don’t deviate far from the norm.
• All HELOCs are adjustable-rate contracts, and rates will change as the Federal Reserve changes rates, up or down.

HELOC’s are credit score dependent. You can’t qualify for a HELOC unless your credit score is above 720.

Cash Out Mortgage Refinance

•This is an option if you can’t qualify for a HELOC or the idea of variable rates on your mortgage has you spooked to get another adjustable rate mortgage.
• If you obtained a mortgage in 2020 or 2021, rates have climbed to nauseating highs; then your rate will go up.

How should I choose?

If you do the math, you’ll want to compute minimum payments vs what a new mortgage payment would do for you. The credit card balance x 3% is usually the standard for minimum payments. Our loan advisors can provide a “Letter of Proposed Accomplishments” to get a better understanding of how much a debt consolidation mortgage can save you.

Take a deeper dive with Homestead Financial Mortgage CEO Jayson Hardie:

"By being open and recognizing our strengths and weaknesses, we can see opportunities for growth and ways to help each other."

- CEO, Jayson Hardie on Growth

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