Cash-out or refi? It depends (if you can even get one)

refinancing a home loan
Tapping home equity is typically done through a cash-out refinance or a HELOC. (Photo by Melanie Stetson Freeman/The Christian Science Monitor via Getty Images)

More homeowners are considering tapping home equity, either out of need or as a hedge against potential need, amid the economic uncertainty that the coronavirus pandemic has caused for millions of U.S. households.

For homeowners with equity to tap, there are two basic ways — a cash-out refinance or a Home Equity Line of Credit.

Both earned a bad reputation leading up to the housing collapse and financial crisis a little over a decade ago, but both are good personal finance options for responsible borrowers.

A cash-out refinance gets the borrower an up-front pile of cash, dependent on the amount of home equity the owner has and how much of it a lender will allow to increase the new mortgage amount. But taking that lump sum also means a larger mortgage payment.

A HELOC is like a really big credit card that can serve as an emergency lifeline.

“Sometimes the cash-out refi is the best option for you. But it is going to require a lot more paper work and it is going to take more time,” Jeff Long, chief lending officer at Apple Federal Credit Union in Fairfax, Virginia, told WTOP.

“And it is going to require you to pay that money back every month, whereas the HELOC is out there if you need it. You can draw on it a little bit here, a little bit there and pay it down as you’re comfortable. It provides a lot more flexibility than a cash-out refinance does,” Long said.

HELOCs are generally interest-only payments for a set period of time, but they do switch to principal and interest after a set number of years, often after 10 years.

In order to tap home equity, a homeowner must have equity, but that is not generally a problem for mortgaged Washington, D.C.-area homeowners.

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Real estate data firm Attom Data Solutions reports 20.1% of mortgaged homeowners in the region are “equity rich,” owing the bank less than half of what they could sell their home for. Significantly more have sufficient equity to qualify or either refinancing or a line of credit.

Real estate firm Core Logic said only 3.59% of mortgage holders were in negative equity as of the end of the first quarter. Average homeowner equity has risen by 6.5% in the past year.

It is Economics 101.

“Supply and demand. And one of the things that we’re seeing in the Washington area is that there is not a lot of inventory out there for people to buy new homes. There is no supply. There is demand. So property values are holding up pretty well,” Long said.

It is, however, harder for homeowners, even those with excellent credit and strong household income, to qualify for a refinance or a HELOC right now. Apple Federal, which has not yet adjusted its underwriting policies, notes the banking industry trend has moved away from equity loan products.

“A lot of institutions have actually ceased lending on cash-out refinancing or HELCOs. The reason for that is that there is risk involved with current instability in the economy. A lot of institutions have decided to pare down on the amount of risk they are willing to take by not lending on these types of products where people are taking equity out of their properties,” Long said.

Jeff Clabaugh

Jeff Clabaugh has spent 20 years covering the Washington region's economy and financial markets for WTOP as part of a partnership with the Washington Business Journal, and officially joined the WTOP newsroom staff in January 2016.

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