What's the Difference Between a Home Equity Line of Credit (HELOC) and Refinancing?

April 06, 2021 | 5 min read Personal

Living in Hawaii isn’t cheap, which makes purchasing a home in Hawaii a huge financial milestone for many. In addition to making your most valuable memories in your dream home, you can also use your home’s equity to reach your next financial goals like renovating your dream kitchen or paying for your keiki’s education. Read on for more information about how you can achieve your next financial dreams through a Home Equity Line of Credit (HELOC) or a Cash-Out Refinance.

What is Home Equity?

Your home equity is simply the value of your home that you own. You can find your home equity value by taking the current value of your home and subtracting anything you currently owe on it.

For example, if your home is currently worth $700,000 and your remaining mortgage balance is $300,000, your home equity is $400,000. Most banks will allow you to draw from your available equity up to 80% of your home’s value. In this example, you might be able to access $260,000.

Your home equity grows consistently over time as you pay off your mortgage. Each mortgage payment lowers your principal balance and increases your home’s equity. This can also increase if the value of your home increases. For instance, if you make renovations to your home, the value of your home could go up.

house

What's a HELOC?

A Home Equity Line of Credit, known as a HELOC, is a revolving line of credit based on the value of your home’s equity and works similarly to a credit card. If you qualify, you’ll receive a credit limit based on your credit worthiness, credit limit request and available home equity. You may receive a payment card that’s used to directly access funds from your HELOC.

HELOCs usually come with a variable interest rate based on an index, which means that if the index rate goes up or down, the interest rate on your HELOC will adjust, too. ASB also provides a fixed rate option for our HELOCs so you can lock in a low fixed rate on a portion or all of your outstanding HELOC balance.

You won’t pay interest on your HELOC until you borrow money from the line of credit. Then, you’ll only pay interest on the money you borrow. For example, if you have a $10,000 HELOC and withdraw $3,000 to pay for kitchen updates, you’ll only pay interest on the $3,000 you borrowed. You’re also able to borrow the remaining available balance of $7,000 if you need it.

Just like a credit card, you can access your credit as much as you need as long as you’re able to pay off the balance to make your credit available again (revolving line of credit). For example, if you borrow $10,000 from your HELOC and your line of credit limit is also $10,000, you will not be able to borrow from your HELOC account again until you pay off all or part of the $10,000 you borrowed, plus interest.

If you are unsure how much money you’ll need, a HELOC gives you flexibility to draw funds (borrow) as needed over a 10 year draw period. HELOCs generally have a quicker loan application process with limited closing costs, and can also be used as your second mortgage.

HELOC Pros

You’ll only pay interest on the money you borrow
You can withdraw HELOC funds at any time throughout the draw period
You typically won’t have to pay closing costs
Your existing mortgage doesn’t change — you’ll continue to make your normal mortgage payment each month

HELOC Cons

You’ll likely have a variable interest rate, meaning it can fluctuate over the life of your HELOC
Having easy access to cash from a HELOC can make it tempting to overspend
You’ll have another monthly payment on top of your normal mortgage payment when you draw on your HELOC

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What's a Refinance?

You might want to consider a cash-out refinance if you don’t want to take out an extra loan on your home. Refinancing your mortgage works by replacing your current 1st mortgage loan with a completely new 1st mortgage loan. Funds from the new mortgage loan are used to pay off the remaining balance of your existing home loan. The new mortgage loan then becomes your regular loan payment. Refinancing can help you to consolidate high interest credit card and loan debts, lower your mortgage loan payment or take advantage of lower interest rates. Refinance can also help you pay off your loan quicker if you switch to a shorter-term loan such as a 15-year mortgage loan.

Cash-out refinances take out a new 1st mortgage loan that’s more than your current loan balance but less than the value of your home. The difference between your home’s value and your existing mortgage loan balance becomes cash you can use for things like home renovations or paying off other debt.

For example, let’s say your home is currently valued at $800,000. If your remaining mortgage loan balance is $300,000 and you have $500,000 of equity in the home, a cash-out refinance accesses that equity by taking out a new loan that’s more than the loan balance but up to 80% of your home’s value. In this example, you get a cash-out refinance mortgage for $640,000 . You use the loan funds to pay off the remaining $300,000 from your existing mortgage and receive the additional $340,000 of loan funds as a lump-sum.

Refinancing Pros

Generally, refinancing has lower interest rates than a HELOC
You’ll only have to make one monthly mortgage payment
May give you access to better mortgage terms like a lower monthly payment

Refinancing Cons

If current rates are high, you could end up with a higher interest rate than your current mortgage
You have to pay closing costs for the new mortgage
You’ll reset your mortgage term, which could mean you have another 30 years of payments
You may not be able to access as much of your equity as you could with a HELOC

house

When is the best time to get a HELOC or refinance?

If the pandemic has taught us anything, it’s that we have to be prepared for uncertainty. We also don’t know how long this low rate environment will last, so taking advantage of it now could help you in the long run. If you got your current mortgage at a high interest rate, now could be a great time to use a HELOC or refinance to reduce your rate. In addition, the application process may be even easier that you previously experienced. Mortgage lenders like ASB now offer online mortgage applications, which allows you to apply from the comfort of your own home. This makes the process more safe, secure and convenient. Of course, you can still apply in person with a loan officer, too.

How to access the equity in your home

A great way to get started is to take a step back and look at your current finances – your existing mortgage loan, your savings and your financial goals. Do you have high interest debt? Do you have plans in the near future? Kids going to school?

As mortgage loan rates rise and fall, it impacts how refinance rates compare to HELOC rates. Some things to consider are:

The loan amount remaining
# of years remaining,
And your current rate on your 1st mortgage loan.

You can also use a calculator to determine your home equity and how to best use it. At ASB, we offer calculators on everything from comparing mortgages, analyzing rates and determining if it’s time to refinance.

Choosing between a HELOC and cash-out refinance can feel overwhelming. Whether you want to update your kitchen or consolidate debt, the equity in your home could help you cover the cost. We recommend talking with one of our experienced ASB Home Loan Officers to see which option meets your needs the most.

HELOC vs Refinance infographic

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Links to the interactive calculators and information provided above are made available to you as self-help tools for your independent use and are not intended to provide investment and/or financial advice. We do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding personal finance issues.

	BUSINESS TERM LOAN	SBA LOAN	SAVINGS SECURED LOAN	COMMERCIAL REAL ESTATE LOAN
Description	Fast and efficient way to obtain immediate financing	Whether your small business is just starting out or already well-established, we have the experience to help you obtain SBA financing	Build your business credit by using your ASB business savings account as collateral	We can assist you with a wide range of commercial real estate loans, including the refinancing of an existing loan or obtaining a new one
Key Features & Advantages	Unsecured loans up to $100,000 Secured loans up to $250,000 Competitive rates No annual fee Flexible repayment schedules	Simplified loan approval process Low down payment requirements Flexible terms and interest rates	Loans from $10,000 to 90% of your available savings account (maximum $250,000) Terms up to 60 months¹ Flexible interest rates No annual fee Savings account used as collateral	Reduced interest rate risk with fixed pricing up to five (5) years Terms of up to 10 years, generally amortized up to 25 years on permanent loans
Uses	Fast, efficient and affordable financing for equipment or furniture purchase, maintenance, debt consolidation and more	Great for purchasing, starting, or expanding a business; choose from a range of financing options to purchase equipment, construct a new building or upgrade existing facilities	Help your business build credit	Purchase or build new income-producing properties² such as warehouses, office and retail buildings, or renovate an existing property

	BUSINESS POWERLINE^SM	BUSINESS PROTECLINE^SM
Description	Revolving line of credit that provides your company with a continual resource of working capital (other business lines of credit are also available)	Provides valuable and convenient overdraft protection for your ASB business checking account
Key Features & Advantages	Unsecured lines up to $100,000 Secured lines from $50,00 to $250,000 Access with Online Banking or Business PowerLine checks³ Low variable interest rate	Easy to access line of credit up to $10,000 Automatic coverage of checking account shortage
Uses	This flexible line of credit helps you grow your business and manage cash flow	Helps you avoid returned check overdraft fees

	BIZ STATEMENT SAVINGS^SM	BIZ TIERED SAVINGS^SM	BIZ MONEY MARKET^SM
Minimum Opening Deposit	$100	$100	$1,000
Minimum Balance to Earn Interest	$100 daily balance	None	None
Minimum Balance to Avoid Monthly Service Fee	$300 daily balance	$500 monthly average balance	$1,000 daily balance or $2,500 monthly average balance
Monthly Service Fee	$4.50	$5.00	$10.00

	BIZ ESSENTIALS CHECKING^SM	BIZ PLUS CHECKING^SM	BIZ DELUXE CHECKING^SM
Minimum Opening Deposit	$100	$100	$100
Monthly Service Fee² ^†Deposit balances include business checking, savings, money market, and CD balances. ^††Loan balances include business loans and lines of credit, except credit card balances.	$5 per month Otherwise, waived if enrolled in Online Banking and eStatements	$15 per month Otherwise, waived if $10,000 in combined business monthly average deposit^† and/or outstanding business loan^†† balances	$25 per month Otherwise, waived if $50,000 in combined business monthly average deposit^† and/or outstanding business loan^†† balances
ONLINE BANKING	BIZ ESSENTIALS CHECKING^SM	BIZ PLUS CHECKING^SM	BIZ DELUXE CHECKING^SM
Monthly Fee* * Optional services may incur fees.	None	None	None
Bill Pay Service Fee	None	None	None
ACH³ and Wire Transfer Services^4,7	Available	Available	Available
ADDITIONAL SERVICES	BIZ ESSENTIALS CHECKING^SM	BIZ PLUS CHECKING^SM	BIZ DELUXE CHECKING^SM
Visa^® Business Debit Card	Available	Available	Available
Discount on Business Check Order	None	$50 off business checks annually	$50 off business checks annually
Image of Deposit Items Fee	$5 per month	Fee Waived	Fee Waived
Monthly Transaction Fee (Checks processed and/or deposited)⁵	First 50 transactions, no charge; $0.50 per transaction thereafter	First 100 transactions, no charge; $0.25 per transaction thereafter	First 200 transactions, no charge; $0.25 per transaction thereafter
Biz Statement Savings^SM Account Monthly Service Fee	Fee Charged⁶	Fee Waived	Fee Waived
Domestic and International Outgoing Wire Transfer Services⁶	Available	Available	Available
Card Processing³ Discounts	None	None	Discount Available
OVERDRAFT SOLUTIONS	BIZ ESSENTIALS CHECKING^SM	BIZ PLUS CHECKING^SM	BIZ DELUXE CHECKING^SM
Savings Overdraft Transfer Fees⁸	$10 per day	$5 per day	Fee Waived
PREFERRED RATES & LOANS DISCOUNTS	BIZ ESSENTIALS CHECKING^SM	BIZ PLUS CHECKING^SM	BIZ DELUXE CHECKING^SM
Business PowerLine^SM Application / Annual Fee Discount⁹	None	Discount Available	Discount Available
Business Term Loan Application Fee Discount⁹	None	Discount Available	Discount Available
CDs (terms of 30 days or more)	Preferred Rates Not Available	Preferred Rates Not Available	Preferred Rates Available

	TRADITIONAL IRA	ROTH IRA
Benefits	Save for your retirement with tax-deferred earnings. Your contributions may be tax-deductible (with certain limitations) but qualified withdrawals in retirement will be taxed.	Save for your retirement with tax-deferred earnings. Your contributions are not tax-deductable but qualified withdrawals in retirement may be tax-free.²
Eligibility	You can contribute if you (or your spouse, if filing jointly) have taxable compensation.	You can contribute at any age if you (or your spouse, if filing jointly) have taxable compensation and your modified adjusted gross income is below certain amounts.
Annual Contribution Limits	See Traditional IRA Contribution Limits	See Roth IRA Contribution Limits
Distribution Requirements	You must start taking distributions by April 1 following the year in which you turn 72 and by December 31 of later years.	Not required if you are the original owner.
Tax Deductions for Contributions	Fully deductible regardless of Adjusted Gross Income (AGI) if you and your spouse aren’t in an Employer Retirement Plan (ERP).¹	Contributions are made after tax.

	PERSONAL UNSECURED LOAN	HOME EQUITY LINE OF CREDIT	CLEAN ENERGY LOAN	PREFERRED CREDITLINE^SM OVERDRAFT PROTECTION
Description	Fixed rate loans to solve big or small credit needs	A line of credit with higher limits secured by the equity in your home	Fixed rate loans to purchase or install eligible residential clean energy systems	A line of credit linked to your American Savings Bank personal checking account
Key Features & Advantages	No annual fee No collateral required	Access line of credit by checks or Online Banking No interest accrued until the line is used	Fixed interest rate No annual fee No collateral required	Fixed interest rate No interest accrued until the line is used No collateral required
Uses	A simple and easy way to pay for planned or unplanned expenses	Finance major expenses such as home renovations, college tuition, and long-term medical expenses	A smart way to pay for your home's solar water heater, Photovoltaic (PV) system, PV Solar Water Heater, Solar Air Conditioning (A/C), or Battery Backup/Storage	Overdraft protection for your checking account
Credit Limits	$2,500 to $50,000	$10,000 to $1 million¹	$1,500 to $70,000	$500 to $15,000
Term	48 months	10-year draw 20-year repayment	120 months	Available until cancelled
Fees
Application Fee	$0	$0	$0	$0
Document Preparation Fee	$0	$0²	$0	$0
Annual Fee	$0	$50²	$0	$25
Early Close Fee	$0	$500 if closed within 3 years³	$0	$0
Prepayment Penalty	$0	$0	$0	$0
Interest - Annual Percentage Rate (APR) (effective 11/01/2024)	Fixed 9.49% to 23.99%⁴	Variable - changes monthly from 4.50% to 18.00%⁵	Fixed 7.62% or 8.985%⁴	Fixed 18.00% Kalo Plus Checking (0.10% discount) and Kalo Deluxe Checking (0.15% discount) off the fixed, non-promotional interest rate offered⁶
Monthly Payment	Fixed monthly payments (Principal and Interest)	Draw Period: Interest Only or Principal plus Interest⁵ Repayment Period: Fixed principal portion equal to 1/240th of the outstanding principal balance at start of repayment period plus interest	Initial Period: No payment during the first 12 months Interest Only Period: 6 months of 5.50% APR interest-only payments for months 13 to 18 Principal & Interest Period: 102 months of fixed principal and interest payments for months 19 to 120	The greater of $30 or 5% of principal balance plus interest
Access to Credit
Immediate Cash	Yes	Yes	Yes At loan closing, ASB disburses 50% of the loan amount to your contractor and the remaining 50% to your ASB checking account for you to pay your contractor according to the terms of your agreement with it.	No. Access to credit is only via transfers to your linked checking account to cover overdrafts.
Over-The-Counter (Branch)	N/A	Yes	N/A	No. Access to credit is only via transfers to your linked checking account to cover overdrafts.
via Check	N/A	Yes	N/A	No. Access to credit is only via transfers to your linked checking account to cover overdrafts.
Available to Those Covered by the Military Lending Act	Yes	Yes	Yes	No
Other Benefits	N/A	Fixed Rate Equity Loan Option (FRELO) available	N/A	N/A

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What's the Difference Between a Home Equity Line of Credit (HELOC) and Refinancing?

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What is Home Equity?

What's a HELOC?

HELOC Pros

HELOC Cons

What's a Refinance?

Refinancing Pros

Refinancing Cons

When is the best time to get a HELOC or refinance?

How to access the equity in your home

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