During the life of a HELOC loan, you can withdraw money when you need it up to the approved limit of the loan, known as the loan withdrawal period. You only pay interest on the amount you withdraw, not on the total amount that you have been approved. Some lenders will require you to withdraw a minimum amount of cash in advance when you hire HELOC, but others will not. This form of revolving credit allows you to borrow cash to pay for college, a wedding, a remodeling, or virtually any other expense, since it allows you to borrow up to 80% of your home equity.
Typically, you have 10 years to withdraw cash from a home equity line of credit, while paying only interest, and then another 20 years to pay your principal plus interest. It's often the best option if you need cash right away, and you also qualify for a better interest rate than your first mortgage. A home equity line of credit, or HELOC, is a second mortgage that gives you access to cash based on the value of your home. With all this added equity, many homeowners have the option of unlocking the cash they need without having to sell their homes or take out expensive personal loans.
Home equity loans, home equity lines of credit, and cash-out refinances have different characteristics, as well as their own advantages and disadvantages. Cashout refinancing replaces your current mortgage loan with a larger mortgage, allowing you to take advantage of the accumulated value in your home and access the difference between the two mortgages (current and new) in cash. The cash-out refinancing process is very similar to the process you went through for your primary mortgage. However, you usually end up paying a higher interest rate for a home equity loan than you would for a cash-out refinance.
Because a cash-out refinance is considered a first mortgage, it has more attractive rates and less detailed approval requirements. If you're a homeowner and need to borrow a large amount of cash, you may be able to take advantage of home equity by taking out a home equity line of credit (HELOC). Many homeowners believe that selling their home is the easiest and most convenient way to get the cash inflow needed. As long as you qualify for both, you can pay the balance of your HELOC (or other debts) by refinancing with cash out.
Instead of a second mortgage, a cash out transaction allows you to withdraw principal from your home by refinancing to a higher loan amount (which would increase your monthly payment), but you can choose to keep the same term. If you don't need cash right away, but are interested in changing the terms of your current mortgage to get a more favorable rate, you may be better suited for a rate and term refinance.