As you service your clients’ needs, it is imperative for real estate agents today to have a depth of knowledge about myriad financial issues, including the difference between a cash-out refinance and home equity line of credit (HELOC).
Knowing the intricacies and differences between the two can make you a more well-rounded agent that your clients can go to with all of their real estate needs.
As a real estate agent, it is important to advise your clients on the pros and cons of each option.
For clients who have financial needs, a cash-out refi may be a good option. Proceeds from the cash-out refinance would be used toward paying off their child’s college tuition and completing some home improvement projects.
With a cash-out refi, a client would refinance their mortgage for more than the current loan. They would receive the difference in cash. Essentially, they are tapping the equity that they have built up on their home to pay for other expenses.
The end result will be a new mortgage for the amount that you still owe on your home plus the additional money that you receive.
A cash-out refi generally can be secured at a better interest rate than a separate loan or credit card. This can save your clients money.
Cheryll A. LeBlanc, a loan officer at Fairway Independent Mortgage Corporation in Holden, Mass., told Realtor.com that clients also can benefit from mortgage tax deductions.
“I would look at a cash-out refinance if my client needed a lump sum of money, like $25,000 for a remodel that may improve their home value,” she said.
If a client was planning to refinance anyway to take advantage of lower interest rates, it is a perfect option. However, if you had purchased your home when the interest rate was around 3.5 percent and today’s rate is over 4 percent, the advantages begin to dissipate.
Clients also may be subjected to closing costs, which can rage form 3 percent to 6 percent of the total loan amount.
When it comes to closing costs, a HELOC may be a smarter choice. While your client will have to pay closing costs on a HELOC, it would only be on the amount of the HELOC. So, if your client seeks a $20,000 HELOC, the closing cost would be $600. The closing costs on a cash-out refinance of $200,000 would be $6,000.
A cash-out refi also rests the clock on your client’s mortgage, especially if they elect to go with a longer term of 30 years.
Moreover, as a client taps a HELOC for $20,000, they are only paying higher interest on the money they are borrowing rather than the entire mortgage.
A HELOC can offer interest rates that are lower than credit cards and the interest your client would pay is tax deductible.
Your clients should never rush toward a HELOC as a complete stand-in for emergency savings.
“A HELOC is a supplement to, but not a replacement for, the savings in your emergency fund,” says Greg McBride, Bankrate’s chief financial analyst.
McBride says there’s one advantage a HELOC cannot provide.
“With savings, it is your money and you can use it as needed, with no cost or penalty. But with a HELOC, you are borrowing, paying interest and using your asset as collateral.”