What is the Difference Between a Home Equity Loan and Refinancing?
November 18, 2019 | Posted by: Kelly Lukens
Though most people believe that their home is a great place to live, others see the value in owning a home. It can be a great investment. However, if you are strapped for cash, it can be a source of ready cash.
You may decide to look into a loan so you can get some cash easily, with a home equity loan or a cash-out refinance loan, though you may just want to refinance your home (to make your payments more bearable.) You need to do your research before you decide how you want to proceed.
What is a Home Equity Loan?
A home equity loan should be looked at as a second mortgage. If you need to borrow money to update your house or do some renovations, you may want to look into a home equity loan. You may also find it helpful if you want to pay off some of your debt (credit cards, car loan, etc.)
To see if you are eligible for a home equity loan, you need to see if you owe less on the home than it is worth. Even if it isn't close to being paid off, you may have a few thousand dollars of home equity.
It is important that you realize that you are putting your house as collateral, in case you default on the loan.
So, Why Would You Want a Home Equity Loan?
Most people choose home equity loans because you can often get a very low-interest rate on them. It might be cheaper to get a home equity loan for your next car than going through the dealership. If you are paying off high-interest credit cards, three or four percent interest is a lot better. You may actually be able to pay it off sooner than you thought.
What Does It Mean to Refinance Your Home?
When you go to refinance your home, you are just going to pay off one loan with another. You are taking out a new mortgage loan, to cover your old one.
So, Why Would You Refinance Your Home?
There are several reasons why someone would want to refinance their home.
• To make the payments easier. If you are able to get a better interest rate, you could really drop your monthly payments.
• To change the terms of the loan. Other people decide that, instead of a thirty-year loan, they want to pay it off sooner. You can refinance your home into a new fifteen-year loan. Your monthly payments should be similar, though you will be able to pay your home off sooner, saving you some interest.
What is a Cash-Out Refinance?
For those people who want to refinance their home, but they also need cash, many lenders also offer a cash-out refinance loan. This allows you to refinance your mortgage and get some cash for different reasons. Your cash-out refinance loan will be more than your current mortgage, so that you can have some money to take care of different things.
So, Why Would You Do a Cash-Out Refinance Loan?
There are a few reasons why you might want to get one of these loans.
• You can pay off your current mortgage (though you will have a new one)
• You might be able to pay your home off quicker (or decrease your monthly payments)
• You have some extra cash to help you pay off debts, do some house renovations, or even buy a large item (such as a car).
• You only have one payment every month, instead of a mortgage, second mortgage, loans, and credit card bills.
How Should You Choose?
The best way to decide which is best for you is to speak to a professional. He or she can talk to you about your options and what your payments are going to look like so that you can make an informed decision that is going to work best for you.