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Rob Black's Money Team Home Equity Line of Credit or Refinance. What's My Best Option?

MEVIOtoday

Apr 27, 2011 Home Equity Line of Credit or Refinance. What's My Best Option?

Question: 

 

Hey Money Team,

My fiance just moved into my home, which I've been using as a party pad for the last 20 years. The kitchen is pretty old and my lady just isn't standing for it. I don't want her to move out, so I think it's
time to invest in a remodel. I got a couple estimates and the contractors are saying it's going to take about three months and $20,000 to remodel. Do you recommend a HELOC or refinance to fund the
remodel? Help me save this relationship or else I'm going back rock and rolling forever!

Thanks,

Doug 

Answer:

 

Hi Doug,

Its great to hear that you are remodeling and cleaning up the Party Pad. But before you jump into this project it is important to know what these 2 loans are: A HELOC or (Home Equity Line of Credit) is a Line if Credit on your homes equity. A traditional refinance with cash out is when you re-write your current loan to a higher balance; cashing out the amount you need. Because a HELOC is easier and cheaper to get, its usually the best choice.   Good to know, especially if you dont need additional stress on top of that new relationship. But HELOC’s usually have a higher rate than a traditional loan and are usually an Adjustable rate mortgage. Which means that you could be
paying more over time.

But If you dont mind a little more paperwork a traditional refinance could save some money. The rate can be fixed The rate can be much lower than a HELOC And in some cases your payments dont increase by that much at all. The downside is you are borrowing the whole amount you need for the
improvements all at once and paying interest on cash you may not have used yet as apposed to the HELOC where you only pay interest on the money you draw. Personally, I like the cash out refinance because Rates are low right now and you can obtain a long term fixed rate.  And in many cases, the new rate may even be lower than your current rate. Rule of Thumb: choose by calculating how much interest you will pay on any unused balances, how soon you will use the money and how fast you will pay it back. I hope this makes it easier for you to choose between a HELOC and a total refinance.