HELOC vs. Cash-Out Refinance: What’s the Difference?

With every mortgage payment you make, you’re building equity in your home. And equity equals ownership. Once you’ve built up a significant amount of equity, you’re able to access that money and use the funds for any purpose you wish. How you access your home’s equity, however, depends on your needs.

The two most common options for accessing home equity are a home equity line of credit (HELOC) and a cash-out refinance. Let’s take a look at the differences between a HELOC vs. cash-out refinance and when each might make sense for your financial situation and specific needs.

What Is a HELOC?

A home equity line of credit is revolving debt. Based on the value of and equity in your home, a HELOC works much like a low-interest credit card. Once approved (usually for an amount up to 90% of your home’s value minus any outstanding mortgage balances), you may draw on the line of credit and use the money however you’d like. For example, you could use your home’s equity to take a dream vacation or perform home repairs, consolidate high-interest debt or assist with retirement budgeting.

As you accumulate a balance on your line of credit, you will make repayments toward the interest and principal. The similarities with how a credit card works continue because as payments are made during the draw period, your principal balance will decrease, allowing you to borrow more money. 

It’s important to note that a HELOC exists separately from your existing mortgage, and comes with its own terms and repayment schedule. For this reason, a HELOC is often referred to as a second mortgage. It’s secured by your home, meaning that if you fail to make payments, you may risk losing your home.

What Is Cash-Out Refinancing?

In short, a cash-out refi is a new mortgage that pays off your existing mortgage, giving you your home equity as a lump sum of cash (via a check or direct deposit into your bank account). 

The result of a cash-out refinance is a brand new mortgage loan and likely different terms than your original mortgage. This means a different interest rate, new monthly payment amount and possibly a longer remaining loan term to pay off the new mortgage completely. 

A cash-out refi could be the way to go if you need a fixed amount of cash immediately and would like to maintain one mortgage payment. A cash-out refinance may also be best if you don’t believe that you have the discipline for a revolving line of credit, which is open to subsequent borrowing.

HELOC vs. Cash-Out Refinance

When it comes to deciding between a HELOC vs. cash-out refinance, consider how and when you intend to use the equity from your home, and how long you will need to pay it back. 

A HELOC is a secondary loan product that is fluid in how you draw from it and how you pay it back. For example, if you don’t have a balance, there is no payment to make. This means that you will only have to pay back the portion of the HELOC you’ve used at any given moment. Typically, you’ll be able to draw from your HELOC over a 10-year period. After the draw period ends, the repayment period officially begins and you’ll no longer be able to withdraw from the HELOC. You will then have up to 20 years to repay the outstanding balance.

This is in stark contrast to a cash-out refi, which may immediately increase your monthly mortgage payment obligation for the next 10, 15 or 30 years. Let’s say your home is valued at $350,000 and your mortgage balance is $200,000. In this scenario, you have $150,000 of equity in your home, meaning you could refinance your $200,000 loan balance for $300,000, and receive the extra $100,000 in a lump sum. Your new mortgage will be for $300,000, and the interest rate and monthly mortgage payment will reflect that.

Key Features of a HELOC

  • Revolving debt to borrow and repay
  • Second mortgage with separate payment and interest rate
  • Payments due only on what you borrow
  • Variable payments during the draw period based on your line of credit balance (Payments may also vary if the HELOC has a variable rate feature including during the repayment period)

Key Features of a Cash-Out Refinance

  • Receive your home equity in a lump sum
  • Continue with a single, refinanced mortgage payment
  • Fixed payments
  • Longer terms may be available (for example, a new 30-year mortgage)

As you can see, there are several key differences between a HELOC vs cash-out refi. Before proceeding with either option you should consider your personal budget to determine what you can afford, and think about how and how often you will use the equity in your home. 

See How Much Equity You Can Borrow Today

When you’re ready, use our HELOC calculator to find out how much equity you may be eligible to borrow.

Read more: What are the Pros and Cons of a Home Equity Line of Credit?

11 Ideas for What to Do with Your Tax Refund This Year

It’s a tax season like no other. Given all that’s going on in the world, it’s understandable that for many folks, priorities have shifted. This year’s tax refunds will likely be greeted with exhausted enthusiasm. But what should you do with your tax return to get the most out of your refund this year?

While the average refund decreased by 11.4% from 2019 to 2020, Americans still received, on average, a refund of over $2,500, according to the IRS. If you’re expecting a tax refund this year, you may be inclined to put that money to use in different ways than in previous years. Let’s take a look at what to do with your tax refund to enhance both your financial and emotional well-being.

Used correctly, your tax refund can help you accomplish a number of goals simultaneously. Ideally, you’ll add to, replenish or start a savings account to prepare for the next emergency, as well as plan for your future and take care of yourself and your loved ones. You can also use your tax refund to pay off debt, start a business and even set some money aside to make a difference in your community. 

Here are 11 of the best ways to use your tax refund this year:

1. Pay Off Debt

If you have outstanding high-interest debt on credit cards, payday loans or other bills, paying those off (or at least down considerably) may be the very best way to use your tax refund. Start with your highest interest debt and pay it down as much as possible. If you can pay it off in full, that’s even better. If not, consider a debt consolidation loan with a lower interest rate to pay off high-interest debt. Once paid off, consider closing that high-interest credit card in favor of one with a more favorable interest rate. 

Choosing to use a tax refund to pay off debt could give you more financial freedom month-to-month, save you money immediately (by not paying as much interest) and relieve stress. 

2. Put Your Tax Return Toward Creating an Emergency Fund

One of the best ways to use a tax refund is to ensure that your future is more secure. If you have a savings account, add to it. If you don’t, use your tax refund to start one! 

Of all the lessons we learned in 2020, having an emergency fund that can help you and your family in the event of unexpected financial struggles, job changes or a global pandemic is one of the most important to heed. 

As you decide how to use your tax refund, be careful not to let the bulk of it sit too long in your checking account, as it’ll likely start to dwindle as you adjust your spending upward with all that extra money easily accessible. 

3. Pay for Home Improvements or Car Repairs

Repairing or remodeling your home isn’t simply about trying to increase its value. Enjoying where you live is critical for your emotional well-being and happiness. Renovating your home, even in small ways, can increase the quality of your life and make you a happier person every day. Not to mention, there are a lot of affordable home renovations that can help you save money over the long run, such as installing more efficient appliances or windows. You might even find some good tax season deals. Just be careful: Big sales can lead to impulse buys if you’re not careful. 

But homes are likely not the only thing in your life that need a little maintenance. If you’ve been ignoring that check engine light and putting off automotive repairs, consider spending some of your refund on fixing your ride this year. Doing so might save you a lot of money down the road.

4. Donate Some of Your Tax Refund to Charity

There are probably a few causes that you wish you could financially support throughout the year but cannot while juggling a mortgage, internet and phone bills, and the rest of your monthly living expenses. And your favorite charity could probably use your support this year more than ever. 

If you’re getting a refund, tax season is one time you can make your wish come true. Donating money doesn’t just help you for next tax season (most charitable giving is tax deductible). It can help your community in the moment and, in turn, give you a sense of fulfillment that’s impossible to put a price tag on.

5. Treat Yourself with Your Tax Refund

It may seem frivolous to spend money from your tax refund on a special treat, but treating yourself to something nice doesn’t necessarily mean you’ve fallen victim to the dreaded ‘impulse buy.’ For example, after the year we’ve had, planning a vacation once it’s safe to take one could do a world of good for your well-being. 

When you think about what to do with your tax return this year, consider finding different ways to practice self-care with anything from a deep tissue massage to cooking lessons, a new fishing rod to that dream vacation.

6. Save for Retirement

The money from your tax refund could go a long way toward bringing your retirement into focus. There are a few ways to use your tax return to save for retirement and, in turn, potentially help with your tax situation next year:

  • Depositing money in an IRA at your bank
  • Investing in a traditional or Roth IRA through a trusted financial services firm (IRA contribution limits have been set at $6,000 for 2021)
  • Setting some of your refund aside in your bank account to offset an increase in your 401(k) contribution

7. Invest in Yourself

One of the best ways to use a tax refund could be to invest in yourself through a professional degree course, gaining new technical skills or even enrolling in graduate school. And doing so may have future tax benefits of its own through the Lifetime Learning Credit! 

According to the IRS, “this credit can help pay for undergraduate, graduate and professional degree courses — including courses to acquire or improve job skills.” Additionally, this credit is worth up to $2,000 per tax return and there’s no limit on the number of years you can claim it.

8. Invest in Your Children

The cost of going to college shows little sign of decreasing, so why not use some of the money from your tax refund to start a 529 College Savings Plan for your children if you have any? Like traditional retirement plans, the earnings in a 529 plan grow tax deferred (meaning that while you can’t deduct your contribution on your federal taxes, you won’t have to pay taxes on your withdrawal to pay their college tuition years from now). 

This useful nest egg may help your child start their academic and professional life with less debt on the path to getting their diploma. However, keep in mind that if you don’t anticipate the funds in your 529 plan covering your child’s entire tuition, it may impact their ability to secure financial aid. As always, do your homework and consult a financial advisor with questions.

9. Start a Business

Whether you’ve been longing to turn your hobby into a side hustle by starting your crafty business on Etsy or need seed money to finally open your dream breakfast café in your hometown, the money from your tax refund could go a long way toward starting a new business. 

10. Buy a Life Insurance Plan

The sticker shock of life insurance plans can be jarring. If buying life insurance has been cost prohibitive in the past or your employer doesn’t offer it, spending some of your tax return this year to secure your family’s future could be one of the wisest decisions of your life. 

11. Take Care of Your Mental Health

Finally, if you’ve been wanting to try therapy but couldn’t afford it because therapy is not covered by your health insurance, put your tax refund to work to improve your mental health this year. When all is said and done, this may end up being the very best way to use your tax refund. 

Read more: Learn how financially savvy people put their tax refund to work

How to Budget Better in 2021 and Why You Need to Start Now

Budgeting may seem like an archaic skill in a world of well-designed banking websites and smartphone apps with convenient notifications alerting you of new charges the moment you buy something. 

However, knowing how to budget will not only help you to live within your means today, but also give you a view into your long-term finances. 

Learning how to budget will show you the potential to grow your savings while giving you something to look forward to, like spending big on vacations and new tech. Here’s how to make a monthly budget:

Start Now

It’s never the wrong time to start learning how to budget or to budget better. Whether you’re living paycheck to paycheck or have a steady stream of discretionary income, there are budgeting tips that can help you spend your money more effectively, start saving (or save more) and pay off your debt to achieve financial well-being. 

List Your Monthly Income and Debt

The genesis of good budgeting is knowing and writing down your monthly take-home pay and your recurring outgoing payments. Take-home pay is the amount of money you receive from your work, Social Security payment, and any investment income that arrives in your bank account on a regular basis. Outgoing money usually involves more than just your housing, car, cell phone and utility bills. 

To budget as effectively as possible, you should also include monthly estimates for things like:

  • Grocery shopping
  • Haircuts
  • Gas/mass transit costs
  • Pizza nights
  • Takeout lunches
  • Credit card payments 
  • Other normal expenses you incur throughout the course of a month

Calculate Your Quarterly and Yearly Expenses

Not all bills are monthly. For homeowners, there can be things like real estate taxes and sewer bills. However, we all have expenses that crop up outside of our normal, month-to-month spending. 

Some examples of quarterly and yearly expenses include:

  • Holiday and birthday gifts
  • Car maintenance (regularly scheduled and the unexpected)
  • Vacations
  • Back-to-school shopping
  • Taxes
  • Utility bills

Spend time thinking about these types of bills as they relate to you, estimate and total them, and divide by 12. With that new figure, make an additional line item on your monthly budget to set money aside (in a separate savings account) for these non-monthly expenses so that you’re financially prepared when they come due. 

Budget Three Months at a Time

Whether you use a spreadsheet or a paper notebook, setting a budget three months at a time will give you more visibility into your money situation. And as they say, knowledge is power. 

Here’s why budgeting three months out can make an impact on your spending habits and, ultimately, your ability to save for the future: 

The Bigger the Picture, The More You Will See

Seeing the bigger picture of your financial life will help you determine whether you have the extra income next month to pay for that big ticket item you’d like to buy or to cover the monthly cost of that new streaming service you want to subscribe to.

Curb Your Spending to Supercharge Your Savings

Knowing you’ll have money to save each month will help to curb your spending. This is because every dollar spent outside your normal, budgeted-for purchases means a dollar less toward that vacation, new flat screen TV, charitable giving or whatever else it is you’re saving for. 

Look for Ways to Trim Spending

In addition to budgeting three months at a time, take a critical look at your budget and ask yourself:

  • Do I spend too much on takeout or delivery? If so, consider eating breakfast at home and packing lunch more often.
  • Am I using all the groceries I purchase? If not, which foods are being wasted and how much are they costing you every time you shop?
  • Are there opportunities to take advantage of coupons, repeat delivery discounts or other savings to reduce my monthly expenses? If so, you know what to do!

Control Your Inbox

Finally, to avoid unnecessary spending, consider stopping the temptation at the source. If you have an email address and if you’ve ever shopped online, you likely have a steady stream of promotional pitches landing in your inbox. There’s no problem treating yourself every once in a while or making thoughtful purchases when it makes sense for your budget, but sometimes these offers can be budget-busters. Consider unsubscribing to some of the store emails that could present unnecessary temptation.

Read more: Finding Balance Between Spending Money and Savings Time

Filing Taxes: What You Need to Know Before Tax Season

It’s that time of year! To help you prepare ahead of filing taxes this tax season, we’ll discuss:

  • What documents and information to gather
  • Why you might want to consider last-minute deductions
  • The best time to file depending on whether you’re expecting a refund versus owing additional tax

Keep in mind that for specific questions or concerns about filing taxes, it’s best to consult a trusted tax professional. 

Decide Who Will File Your Taxes

How complicated do you expect your tax situation to be? Did you have a major change last year, like a divorce or marriage? Or did you start a business, cash out a 401(k) or have a child? If so, you may need professional help filing your taxes. That’s why it’s always best to know early on whether you’ll need a pro. (Keep in mind that their prices could rise closer to the April 15 tax filing deadline.) 

The Internal Revenue Service reports that more than 80 million taxpayers used paid professionals to complete and submit their tax returns last year. If you plan to go this route, it’s important to organize your receipts, forms and other documents well before tax time. 

You May Be Able to File Your Taxes for Free

If your tax situation doesn’t require a professional this tax filing season, you may want to look into IRS Free File. This public-private partnership between the IRS and the tax preparation software industry provides brand-name tax filing products for free to many Americans, which means you could prepare and file your federal income tax online for free.

Gather Documents

Now is the time to gather up: 

  • W2s
  • 1099 forms
  • Donation receipts
  • Calculated childcare costs
  • Medical bills paid out of pocket
  • Investment interest tax forms
  • Property tax receipts
  • Student loan interest payments
  • Anything else related to your financial life from the past calendar year 

You or your tax professional may not need it all, but being armed with more is better than less when it comes to tax filing. 

Compile Personal Information

Chances are you have your own Social Security number memorized. Whether you file taxes electronically yourself or with the help of a tax professional, you’ll need to have your spouse’s Social Security number if filing taxes jointly, and those of the dependents you’ll claim as well. 

Additionally, you may need addresses, dates, and dollar amounts of vacation and rental properties if you bought or sold them last year. Now’s the time to pull together and write down all of this information to make tax filing season seamless. 

Have a Copy of Last Year’s Return on Hand

Cross-referencing this year’s return with your last can be helpful in making sure you don’t forget something, like a deduction you’re still eligible for or a source of passive income you need to claim. 

Consider Last-Minute Retirement Plan Contributions

The 2020 IRA contribution limit was $6,000 plus $1,000 in catch-up contributions for those 50 and older. If you have extra savings and haven’t maxed out your retirement plan contribution yet, you may be able to reduce your taxable income to pay less tax this year.

Be Mindful of Tax Scams

One thing you need to know before filing taxes is that there are many tax scams out there to be mindful of, including tax preparers promising to deliver a bigger return. Remember that you sign your returns under penalties of perjury. Even if you work with a tax professional, it is you who’s responsible for any incorrect or misleading information, whether it’s a mistake or fraud. Make sure the person preparing your taxes is well-credentialed to reduce your risk. Additionally, you should never respond to telephone calls or emails claiming to be from the IRS or the U.S. Treasury. The only way the IRS will correspond with you is through the U.S. Mail, meaning that those phone calls and emails are not on the level.

Need More Time?

If you need an extension this tax filing season, you can submit a request by April 15, 2021, or your particular tax deadline. You can push your due date out up to six months. And you won’t be alone in doing so, either. Last year, 12 million Americans needed more time for filing their taxes.

Make a Plan for Your Refund

If you expect to receive a tax refund, make a plan for what you’ll do with that money so that you make the most of it. Will you put some away in savings, pay off credit card debt or give to charity? What you do with your refund is up to you, but it’s best to have a plan before your tax refund arrives in your bank account.

File Your Taxes

Of course, all of your diligent tax season preparations should culminate with the filing of your taxes on time, so mark your calendar!

Read more: Is HELOC Interest Tax Deductible?

2020 Tax Guide for Prosper Investors

It’s tax season, and to help Prosper retail investors navigate the process, we’ve created the 2020 Prosper Tax Guide. This guide has general information about the 1099 tax form(s) you may receive from Prosper.

To access the Prosper Investor Guide for 2020, click here.

If you’re a retail investor who holds Notes from Prosper, here’s what you need to know:

  • In connection with your investment through Prosper, you may receive the following forms for the 2020 calendar year:
    • 1099-OID: Net interest of $10 or more received in 2020
    • 1099-MISC: Other income (such as late fees) of $600 or more received in 2020
    • 1099-B: Gross proceeds from sales or recoveries received in 2020 from Notes corresponding to loans charged-off in 2020 or prior years.
    • These 1099 tax statement(s) will be available in your Prosper account on February 1, 2020. Please note, it is your responsibility to check your account and review all information provided before filing your tax return.

These 1099 tax statement(s) will be available in your Prosper account on February 1, 2020. Please note, it is your responsibility to check your account and review all information provided before filing your tax return.

Prosper does not provide tax, financial or legal advice and neither this post nor Prosper’s tax guide is intended to be tax, financial or legal advice. We recommend that you consult with your financial or tax advisor if you have any questions. The IRS also provides guidance on the back of the 1099 tax form(s) designed to describe what is reported in each box on the form.

HELOC Home Improvement: The Best Home Improvements to Increase Value

Of course you want your home to be worth as much as possible should you ever sell it, but the other benefit of making some of the best home improvements to increase value is that those upgrades, everything from a fresh coat of paint to a new kitchen, may also make you happier while living in the property. But not all renovations are created equal when it comes to boosting a home’s eventual selling price. Here’s a look at eight opportunities to use HELOC home improvement funds with the ultimate goal of increasing property value.


From exterior doors to kitchen cabinets, paint color may raise the price of your house by thousands, making painting one of the best home improvements to increase value. This is especially important to realize because the cost of buying paint and/or hiring a professional painter pales in comparison to the price tag on other home repairs and renovations. Even something as simple as painting your front door could net you more at settlement because it’s said that homes with charcoal, smoky, or jet black doors sell for $6,271 more than expected. Conversely, dark red or brown interior walls could cause your home to fetch $2,310 less than you’re hoping. In short, use HELOC home improvement funds wisely when shopping for paint!

Minor Bathroom Remodel

Whether you choose to reglaze or replace that old tub, retile the floor, or put in a brand new toilet, sink, or vanity, a minor bathroom remodel could be one of the best home improvement decisions you’ll make. You might just recoup the entire cost of the renovation, and turn a tidy little profit too!

Garage Door Replacement

The average cost of a new garage door is $3,600 and studies show that you may get back nearly all of that cost when selling your home. This means that a garage door replacement could be a good use of your HELOC home improvement money. Curious about using your home’s equity? Here’s everything you need to know.


Real estate is all about location, location, location but it’s equally about curb appeal. One of the best home improvements that could increase the value of your home is to spruce up the landscaping, especially in the front yard. Planting new trees, laying down fresh sod, installing a dramatic fountain or adding a pop of color may make a stellar first impression for potential buyers when you’re ready to sell.

Manufactured Stone Veneer

Adding manufactured stone veneer to the front of your house is one of the best home improvements to increase value because it has the potential to pay for itself in sending your home’s curb appeal through the roof. This classy look on a portion of your exterior walls adds a touch of elegance and could add more than a few thousand dollars to your asking price!

Entry Door Replacements

One of the more affordable home improvements to increase the value of your property is a replacement front entry door. With a relatively small price tag (the average cost is under $2,000) you can expect to increase the value of your home while recouping nearly 70% of the renovation expense.

Kitchen Remodel

With access to HELOC home improvement funds, you could spruce up the space where the mealtime magic happens, and recoup, if not all, very close to every penny spent on a minor or major kitchen remodel. You don’t have to take your kitchen down to studs to beef up the resale value of your property, even a fresh cabinet paint job and new recessed lighting could do the trick.

Replacement Windows

Not only will new windows make your home look nice without breaking the bank, but the economic benefits through better energy efficiency could be huge when looking to use a HELOC for a home improvement that may increase the value of your property.

Are you considering applying for and using a home equity line of credit for upcoming home improvements? Use our HELOC calculator today to see how much of your home’s equity you can access.

Read more: What is a HELOC and how does it work?