HELOCs are similar to home equity loans, but instead of taking one lump sum, you can open a revolving credit line, which allows you to borrow as needed over a period of time (called the “draw period”).^[3] This is similar to the way credit cards work. You are given a credit limit, and you can borrow as much or as little of that amount as you need while the credit line is open. Then you repay the amount borrowed in installments over the repayment period.

HELOCs are often a favorable alternative to credit cards because HELOCs typically offer lower interest rates and higher limits than credit cards. HELOCs are able to offer better terms because, like home equity loans, the borrower’s home is used as collateral for the loan. Securing the loan to real estate makes the loan safer for the lender, allowing them to offer these lower rates and higher line of credit limits.^[2]

Understanding how to use a HELOC can help you decide if a HELOC is a better fit for your situation than a home equity loan. If, for example, you’re planning to renovate an older home, a HELOC may be a more attractive option because it allows you to borrow more if unexpected expenses come up.

Unlike home equity loans, which are typically fixed-rate, HELOCs usually come with an adjustable interest rate, meaning that the interest rate can rise and fall with the market.^[3] However, if you prefer the flexibility of a HELOC with the stability of a fixed interest rate, you might consider PNC Bank’s Choice Home Equity Line of Credit, which allows you to lock in a fixed rate part of the line of credit.

This detailed article on HELOCs vs. Home Equity Loans could help you decide which option is a better fit for you. You can also contact a home equity lending specialist directly for personalized guidance.

A cash-out refinance takes a different approach to accessing home equity. Rather than taking out a new loan or line of credit, independent from any existing mortgage, cash-out refinancing replaces your existing mortgage with a new mortgage.^[4]

Here is an example to help explain the concept of cash-out refinancing:

The owner of a $600,000 home has a mortgage of $200,000. This means they have $400,000 in home equity. They want to use $100,000 of their equity to help finance their children’s college education, and they decide a cash-out refi is the right option for them.

In this case, their existing $200,000 mortgage is paid off with the funds received from a brand new $300,000 mortgage loan. And the owner gets to pocket the $100,000 difference.

Importantly, refinancing means that the terms of your original loan no longer apply. So, if you locked in an exceptionally low interest rate on your original loan, you might not want to refinance at today’s rates. On the other hand, if your original loan has a higher interest rate than today’s going rates, you might be able to save some money on interest expenses over the term of your loan. Cash-out refinances may have significant fees as well.

If you think a cash-out refinance may suit you better than a home equity loan or HELOC, you can learn more about the mortgage refinance process and start a refinance application online.

If you would like to discuss your options with a professional, you can always contact a lending specialist in your area.