Things to Consider for Refinance vs Home Equity Loan

There's no denying that home ownership comes with more responsibilities than renting. If an appliance breaks, you can't call up a landlord—you are the landlord.

The upside is that home ownership is an opportunity to build equity. As your equity accumulates, so does your personal net worth. And if you decide to sell the property, you can use your equity as a down payment on another property, or use it to increase your savings.

But, what if you have no plans to move? Does this mean that you’ll never use your equity?

One good thing about owning is that you don’t have to sell to touch your equity. Several programs—like a mortgage refinance and a home equity loan—allow you to pull cash from your home.

They serve similar purposes. But depending on your unique situation, one option might be better than the other.

The Difference Between a Refinance and Home Equity Loan

Refinancing is essentially getting a new mortgage to replace an existing mortgage. The process might sound simple enough, but it’s more complex than some realize. This is because having an existing mortgage doesn't guarantee your approval, nor does it guarantee the best refinance rate.

Think back to when you applied for your original mortgage. You likely remember filling out a loan application, authorizing a credit check, and submitting supporting documentation.

Since a refinance mortgage involves applying for a new mortgage, you have to repeat this process all over again. If you’re approved (yes, if), only then is there the option to cash out some of your equity.

Be mindful that a cash-out refinance will result in a bigger mortgage loan—this isn’t free money. So if you currently owe $185,000 and you pull $30,000 from your equity, your new mortgage balance will be $215,000 (or more if you finance your closing costs).

A home equity loan also allows you to tap your equity. But instead of creating a new mortgage, you get a loan in addition to your first mortgage. This is why home equity loans are also known as second mortgages.

Which Home Equity Solution is Right for You?

Honestly, it really depends on your situation. Asking yourself the following questions can help you make a decision:

1. What are the lowest refinance rates today?

If home mortgage rates have increased since getting the original mortgage, refinancing could leave you with a higher interest rate. If you’re in such a circumstance, it may make more sense to get a home equity loan, which would allow you to keep the better rate on your first mortgage.

But if mortgage rates have dropped considerably since getting your original mortgage (and you're able to qualify for a lower rate), a refi could be the cheaper option. A mortgage refinance calculator can help you determine what your new payment would be with the lower rate.

2. How much cash do you have in savings?

When considering a refi versus a home equity loan, consider how much cash you have in reserves. Since refinancing creates a new mortgage, you’re also responsible for paying closing costs again. Home equity loans also have closing costs, but these costs are often less than the cost of refinancing.

3. How much cash do you need?

Even though your income ultimately determines how much you’re able to borrow, the amount you’re able to borrow using home equity loan will differ from how much you can take from a cash-out refinance. It’s important to work with a lender who can talk to you about your unique situation and help you determine the best loan option for your needs.

4. How long will you live in the home?

Thinking of refinancing? Make sure you live in the home long enough to breakeven. In other words, don’t move until the monthly savings from refinancing offsets the cost of refinancing. To illustrate, if a cash-out refinance reduces your mortgage payment by $150 a month, and you paid $5,000 in closing costs, you should live in the property for at least another 33 months to breakeven.

What Will You Do?

Not all equity options are the same. Let the experts at Blue Spot Home Loans help you decide the best way to benefit from your equity. Call us at (800) 976-5608 or fill out the contact form today to get started.