Do you decide between a mortgage and refinancing? Both options give homeowners the opportunity to access their valuable home equity with the flexibility to use that cash as they wish.
In addition, refinancing allows homeowners to lock in at a lower interest rate or change the duration of their loan.
If you are trying to figure out if a refinancing loan or equity loan is right for you, consider your needs as well as the advantages and risks of both loan options.
What is a home equity loan?
As a homeowner, you have many options to take advantage of the accumulated equity in your home – one of which is a equity loan. A home equity loan is a type of loan that allows homeowners to borrow for equity in their homes.
Lenders usually pay off a mortgage-backed mortgage. The biggest advantage of a home loan is its flexibility. Funds can be spent on anything from medical bills, home renovations, and even travel.
Since equity loans are secured by your home, lenders may offer a lower interest rate than for personal loans or credit cards. However, defaulting on your loan puts you at risk of foreclosure.
How does a home equity loan work?
Lender requirements vary, but you generally need:
- At least 15% to 20% equity in your home
- Good credit
- Low debt to income ratio
- Fixed source of income
Once you have been approved for a equity loan, your lender will provide you with documents stating the amount you can borrow (up to 85% of the value of the home), the interest rate and the related commissions.
These charges vary from lender to lender, so it is a good idea to shop around and compare.
After disbursing the funds, you will need to repay the initial loan amount and fixed interest rate on fixed monthly payments. Depending on the lender, the repayment for your mortgage loan can be up to 30 years.
While a shorter term allows you to repay the loan faster, it means higher monthly payments compared to a 30 year period.
What Does Refinancing Mean?
If you refinance a home loan, you are replacing your current loan with a new one, usually with new capital and a different interest rate. There are several reasons why a homeowner may choose to refinance his or her mortgage, such as lowering the interest rate, shortening the loan term, or withdrawing equity in the form of cash.
Here are two common types of refinancing:
Interest rate and duration refinancing: This is a type of mortgage refinancing that allows homeowners to change the duration and interest rate of their current mortgage by replacing it with a new loan. Homeowners generally choose this option if they want to lower the interest rate, reduce their monthly payments, change the type of loan or change the length of the period.
Redemption by redemption: With cash refinancing, homeowners get a new mortgage on their home, up to 80% of the value of your home, for more than they owe. This difference is paid at closing and can be used on almost anything. However, this new loan is bigger and comes on its own terms.
How does refinancing work?
Refinancing a mortgage is similar to the process you followed with your original mortgage. You must apply and qualify for the loan before approval. The lender will assess your financial situation and set the interest rate based on your level of risk.
It is also important to keep track of closing costs, which can vary from 2% to 5% of the loan amount.
Suppose you want to raise some equity in your home and decide to use a cash refinance. You bought a house for $ 300,000 many years ago and got a mortgage for $ 200,000. Your current balance with your lender is $ 100,000.
If the value of the property remained the same, you would have at least $ 200,000 in equity.
You could possibly qualify for $ 225,000 and use $ 100,000 to pay the remaining capital. This leaves $ 125,000 in cash to use as you wish.
Comparison of mortgage loan with share capital versus refinancing
If you compare a home equity loan to a redemption refinance, both options allow homeowners to leverage their own funds to borrow more money.
A redemption refinance replaces an existing loan with a new one, which means you only have one loan and one payment to worry about. A home equity loan, also known as a second mortgage, is another loan that must be repaid in addition to your original mortgage.
Redemption refinancing is also considered a first guarantee loan and is usually accompanied by lower interest rates. First pledge debtors are repaid before all other debt holders in the event of foreclosure or bankruptcy. A higher interest rate on a home equity loan can be offset by lower closing costs.
If you want to get some equity, but are stuck deciding between a home equity loan versus refinancing, a redemption refinancing is a great option if you can lock in at a lower interest rate. A home equity loan may be worth considering if you want to raise a large amount of equity or if you can not find a lower refinancing rate.
Home equity loan against refinancing? Ask a Total Mortgage specialist
When deciding between a mortgage and refinancing, both options give homeowners quick access to cash using their home equity. However, one choice may be more reasonable than the other depending on your needs and financial situation.
Are you looking to refinance or take out a home equity loan? Consider Total Mortgage for a fast-paced, personalized mortgage experience. We work with borrowers across the country.
Find a Total Mortgage specialist near you.