What is the difference is between a home equity line of credit and a cashout refinance, also called a home equity loan?
What is a home equity line of credit?
One of the things here in Canada is that a bank will actually let you borrow against the equity in your home. And a home equity line of credit is basically like a normal line of credit, except the collateral is against your home. So if the bank determines that there is $100,000 worth of equity in your home, they will give you a line of credit for that $100,000. You do not need to use it right away, it will sit there just like a line of credit would. And as soon as you do use it, then that's when you start paying interest on it.
And in fact, a lot of times those home equity line of credit loans are actually interest-only payments. So that's all you're required to pay on them. So the cost to actually use them is very, very low.
Home Equity Loan
So now that we know what a HELOC is or a home equity line of credit is, let's talk about what a cash out refinance is or a home equity loan. So this is basically the same thing where the bank is going to give you a loan against the value or the equity that's in your property, except it's not gonna sit in the line of credit, what it's gonna do is they're actually gonna hand you that $100,000 that I had mentioned before and it would be sitting in your bank account and they're gonna set you up on a predetermined payment schedule, much like a mortgage.
Home Equity Line of Credit (HELOC) vs Home Equity Loan (Cash Out Refinance)
So when would you actually use a home equity line of credit or a home equity loan? And is there really a reason you'd use one over the other? And I think there is. So if you're using a home equity line of credit, you don't actually pay to use it until you've taken some money out of it. With a home equity loan or a cash out refinance, you start paying right away. So sometimes people will use that, if they know that they're gonna use the money right away, they have the cash right in their account. But a lot of times the home equity line of credit actually offers you more flexibility than a cash out refinance will.
If you have any further questions about the difference between these two types of loans, then leave a comment down below. I'd love to chat with you.