Few things are more frightening than being in the red and not knowing how you’re going to get out. This is especially true when it comes to your mortgage – after all, it’s a long-term commitment. Fortunately, there are two options that may be better for you: a home equity loan or a refinance. Let’s take a closer look at each and see which is the better choice for you.
What is a Home Equity Loan?
A home equity loan is a type of credit that allows you to borrow money against the value of your home. This is different from a refinance, which is when you borrow money against the value of your current mortgage and change the terms of your mortgage. A home equity loan can be helpful if you need cash quickly or if you want to take advantage of increased housing prices. Home equity loans are also often considered safer than other types of loans because home values tend to stay stable over time.
What is a Refinance?
A home equity loan is a great way to borrow money if you want to use the money for something other than your home. A refinance is a similar type of loan, but it’s usually used to reduce your monthly payments on your existing mortgage.
The main advantage of using a home equity loan is that you can borrow more money than you would be able to get with a refinance. This means that you could pay off your old debt faster if you use a home equity loan rather than a refinance.
The main disadvantage of using a home equity loan is that interest rates on these loans are usually higher than those on refinances. This means that you could end up paying more in total over the life of the loan.
Overall, it depends on what you need the money for and which option will save you the most money in the long run.
Pros and Cons of Home Equity Loans and Refinancing
A home equity loan is a type of debt that people use to borrow money against the value of their homes. The borrower typically uses the money to pay off other debts, buy groceries or invest in stocks. A refinance is exactly what it sounds like – you refinish your current mortgage and get a new one with lower interest rates. Home equity loans have some obvious benefits:
– They’re quick and easy to get.
– You can borrow as much as you need, without having to worry about getting approval from your lender’s credit committee.
– They’re usually cheaper than refinancing your mortgage.
However, there are also some drawbacks to using a home equity loan:
– You may not be able to withdraw the entire amount you borrowed at once.
– If you stop making your mortgage payments, you could lose your house.
– Your home may not be worth as much if you take out a home equity loan in bad economic times. Refinancing can protect your investment in case things go bad, but taking out a home equity loan during good times may not be as risky.
When to consider a Home Equity Loan or Refinance
When you’re considering a home equity loan or refinancing, it’s important to consider your specific financial situation and goals. Here are four tips to help you decide which option is right for you:
1. Calculate Your Current Home Value
Home equity loans and refinancing can be good options if your home is worth more than your outstanding debt. To figure out your home’s value, use a tool like Zillow or Trulia.
2. Calculate Your Debt-to-Value Ratio
If your home’s value is greater than your outstanding debt, you may want to reconsider a home equity loan or refinancing because the interest rates on these products can be high. To get an accurate idea of how much debt you’re taking on, use a calculator to figure out your debt-to-value ratio. This number is important because it’ll tell you how much money you could lose if interest rates go up.
3. Consider Your Financial Goals
If you only have a few years left on your mortgage before it expires, refinancing may be the best option for you. If you have more time before the mortgage payments are due, a home equity loan may be better because the interest rate on these products tends to be lower.
4. Review Your Credit History and Income qualifications
Before you take out a home equity loan or refinancing, it’s important to check your credit history and income qualifications. Make sure you have the financial resources to repay the loan in full and on time.
Final Thoughts
To determine which option is better for you, you’ll need to consider your specific financial situation and goals. If you need to borrow a large amount of money and have a lot of equity in your home, a home equity loan may be a good option.
On the other hand, if you want to lower your monthly payments or get a lower interest rate, a refinance may be a better choice. It’s also important to consider the costs of each option, as both home equity loans and refinancing can come with fees and closing costs.
By carefully considering your options and weighing the pros and cons, you can make an informed decision about which option is best for you.
