A home is more than just a place to relax at the end of the day. It’s also an investment that can be very beneficial during times of need.
Emergencies, paying for education, getting home updates or repairs, or other needs can be covered with a home equity loan or by refinancing your current mortgage. Both of these options allow you to get funding when you need it, so choosing the right option depends on your specific needs.
Understanding the benefits and differences between each option can help you make an informed decision about the best option for you.
What’s the Difference between a Home Equity Loan and Refinancing a Mortgage?
A home equity loan allows homeowners to leverage the equity in their homes to borrow money. It lets you borrow a lump sum with a fixed interest rate, fixed terms, and fixed monthly payment. A home equity loan is similar to a mortgage.
You can also use a home equity line of credit (HELOC) to use the equity in your home as collateral for funding. It lets you get approved for a credit line that you can use as needed with a variable interest rate and monthly payments that vary per month. A HELOC works in a similar way as a credit card.
Refinancing a mortgage can serve multiple purposes. You could refinance to make changes to your current mortgage. You might want to lower your interest rate or decrease the term of your mortgage. Or perhaps you want to refinance to switch from an adjustable rate mortgage to a fixed rate mortgage. Another reason to refinance is to tap into your home’s equity to get money.
How to Choose between a Home Equity Loan and Refinancing a Mortgage
Consider your specific needs when choosing between home equity loans and mortgage refinance options. If you want to borrow as little or as much as you want, when you want it without a fixed end date, a HELOC could be a good fit.
If you simply want to improve your home’s interest rate or terms, refinancing your mortgage could help.
If you need a lump sum of money for a specific cost, like putting in a pool or consolidating debt, a home equity loan or refinancing your current mortgage are good possible options. Looking at the interest rates, terms, and loan details would help you decide which of the two would be a better fit.
Keep in mind that a cash-out refinance would replace your existing mortgage and provide you with a new one that has a higher amount than your current mortgage. You keep the difference between the new loan amount and your current loan balance, after leaving some equity in the home and paying the refinance fees and closing costs.
With a home equity loan, you would still have your original mortgage, then the home equity loan would be like a second mortgage. So you would have two payments each month and two different set of terms.
If you’re a homeowner in need of money, home equity loans and refinancing your mortgage are both options that can help. Review the specific terms, closing costs, and interest rates for each loan to determine the better choice for you.