Cash-out refi/HELOC - what's the difference?

[Justin Lavoie]

I have owned my primary residence for three years. Cash-out refi vs. HELOC. Advantages/disadvantages between the two? Anyone care to share their experiences and limitless possibilities when using either of the above?

[Jay Hurst]

A cash out is (typically) a fixed rate mortgage with typical closing costs for your area and has to be in first lien position. So, if you have a current mortgage you will the net the difference between the new loan and your payoff (if you have one) minus closing costs.  Because you receive the funds right away you start paying interest on the funds at that point.  You also cannot go back to pull more cash out as you pay down.

HELOC's can be first or second liens (in a lot of situations anyway) and they are adjustable rates maybe after a short fixed period with interest only payments required for a period of time. You do not have to pay interest until you draw from the credit line. You can draw the line up or down meaning you call pull out cash pay it back then later pull it back out again.

IMO if you have long term cash needs like renovating your home or a property that you plan on holding for a long term the fixed rate cash out makes sense. But, if you need credit to use for short term like using the funds to buy a property with cash, then place perm financing on the property paying back the HELOC to be able to use again the HELOC makes sense as the use is short term so the adjustable rate is not as big of a factor.