Refinancing Vs. Home Equity Loans

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Your home’s equity is the difference between the house’s market value and the amount that you owe on a home loan. You may decide that you would benefit by cashing out on some portion on that equity for any number of reasons. Some of these reasons might include using the money to start a business, to invest in a retirement account, to help your kids pay their tuition, or even to make improvements to your house. If you want to cash in some of your equity, you might wonder if refinancing or getting a home equity loan will be a better solution.

What’s the Difference Between a Home Equity Loan and Refinancing?

When you refinance, you replace your old mortgage with a new one. Home equity loans don’t replace your old mortgage; they are simply new loans that are secured against your house because of the equity. If you take out a home equity loan, you will still have your original mortgage to pay.

One of the biggest differences is that closing costs are usually higher for an entirely new mortgage. However, interest rates are higher for home equity loans. The exact difference in closing costs and interest rates will depend upon the loans you can qualify for and the financial institution.

If you don’t plan to keep your house for a long time, it might make more sense to get a home equity loan. Because you’ll need to pay the loan off when you sell your house, you won’t have to pay the higher interest rates that long. Since you’re not going to reduce your original mortgage payments, you’ll benefit from lower closing costs.

If you do plan to stay in your house for years, you will probably benefit from refinancing your house. If you find a loan with lower interest rates than you pay now or extend the term of your loan, you can reduce your monthly payments. It will take time, but you should be able to recoup your closing closing costs over time.

What to Know About Refinancing and Home Equity Loans

You should always shop around for offers from different banks and mortgage companies. Rates can vary wildly, and some loan companies may have programs that will benefit you more than others. If you plan to repay either of these loans for years or even decades, even a small difference in interest rate can make add up. Loan officers and mortgage brokers can also discuss which option would be better for somebody in your particular situation.