Home Equity Loan versus Refinance Home Loan

You need extra cash and you get an offer about a home equity loan or a refinance home loan. What is the difference between a home equity loan and a refinance home loan?

If you want to change something in your note, you need a refinance home loan. A refinance home loan enables you to change the terms of your note. A refinance home loan means you take out a new loan to replace your old one.

If a refinance home loan changes your note, how does it give you cash? A refinance home loan can have a cash-out option. Homeowners get a refinance home loan but the new loan amount of their refinance home loan is higher than what they owe. The difference between the refinance home loan and amount originally owed is the cash-out amount.

What are the advantages of a refinance home loan? A refinance home loan means you can take advantage of the market’s lower rates if you qualify. A refinance home loan means you can leave out items from your original mortgage note like the escrow account.

The downside is, you have to pay for closing costs when you get a refinance home loan and these costs can escalate to thousands. A bad credit score during refinance means high interest rates.

What is a home equity loan? A home equity loan is a new loan on top of your existing mortgage, if you have any. How does home equity loan work? A home equity loan is a loan that uses your home’s equity as collateral. Your equity is the current value of your property less your unpaid loan balance. Keep this basic formula in mind and you never have to ask how does a home equity loan work.

Home equity loan rates are lower than a regular mortgage. However to qualify for good home equity loan rates you need to meet the bank’s criteria.

A home equity loan is cheaper than a mortgage in terms of fees. You do not have to pay for closing costs for a home equity loan.

The term of a home equity loan is shorter than a regular mortgage. Home equity loan usually have 10 or 15 year terms at the most. The interest portion of your home equity loan payments are tax deductible.

There is a type of home equity loan called a home equity line of credit or HELOC. A HELOC is valid up to 30 years from the time you took out the home equity loan but you never have to pay anything until you actually use the credit. In short, a HELOC is a home equity loan on stand-by.

A refinance home loan and a home equity loan have their own advantages and disadvantages. If you need extra cash, you are better off with a home equity loan because an equity loan entails less paper work and closing fees. If you need the terms of your note redone, get a refinance. Somewhere down the road these two overlap; in the future should rates go down you can refinance your equity loan to get a new lower rate.