The purpose of the article is to give you some information on Choosing Between Home Equity Loan and Refinancing Mortgage. It is said that ‘Half knowledge is dangerous’ as it gives people the deceiving perception of being an expert and a lightning bolt of loss may only act as an eye opener. This phrase is applicable in various aspects of life which includes making financial decisions like raising debts. There are numerous options of financing and each one has its pros and cons. Hence it is necessary to evaluate the options to make a sound decision as a little ignorance may end in a bigger damage.
When a person needs to raise additional money or is in financial problem or wants to take advantage of lower interest rates, he faces a dilemma of choosing between home equity loans and refinancing mortgage. There is no thumb rule stating which type of loan is valid in which case and thus the decision is complex and confusing. The reason for which a person wants to raise a loan greatly influences the type of loan that the person should tap. The interest rates in both cases are lower than other forms of credit.
A home equity loan is used to access extra cash using a person’s equity in his home. Equity is the difference between the present value of house in market and the amount of loan owed on that house. It is a measure of how much a person actually ‘owns’ the house.
Refinancing home mortgage involves taking up of a new loan to pay off the existing loan. It helps spread the tenure of mortgage and take advantage of lower interest rate to make cash savings.
Though both home equity loans and refinancing help in tapping cash equity, they differ in their processes for getting and repaying cash.
Here are some factors that differentiate the two which should be considered before deciding on the type of mortgage–
• Way of Accessing Cash – In home equity loans, there are 2 ways of accessing money – getting a credit line or lump sum money. In refinancing mortgage there is no option but to take the cash in lump sum.
• Closing Costs – Home equity loans do not have closing costs associated with them while refinancing mortgage involves closing costs. • Purpose of Loan – If a person has a high credit card debt and needs extra cash to repay it, there is no sense in going for refinancing. Refinancing would mean stretching the credit card as long as the refinancing tenure. In this case, home equity is a better option.
• Balance of Mortgage – If a person is near the end of the original loan’s tenure i.e. the mortgage balance existing is less, he would not like extending the entire period of loan by refinancing for the whole value of house. Refinancing will not only increase the loan tenure but also increase the overall interest paid on the loan.
• Interest Rate – The interest rate should also be lower than the present mortgage to attract a person.
• Present Situation and Forecast about Economy – When the economy is low, there are chances of lower interest rates on equity; when the economy is booming , there are higher chances of increase in interest rates.
• Structure of loan – Home equity will add another loan to the earlier mortgage. There will not be any changes in the earlier loan structure. In refinancing, the entire loan structure gets changed as a new loan is taken to repay the earlier loan.
• Payments – Home equity adds another monthly payment to the existing loan while refinancing will entirely change the monthly mortgage payment.
Both home equity loans and refinance mortgage help in saving in short term as well as long term. The rates, fees, costs and terms vary from lender to lender and hence they should be chosen after proper analysis and research. A lack of research may end in increased expenses and higher risk to the property.