Refinance vs Home Equity loan

Refinance vs Home Equity loan

Is there a difference between refinancing your mortgage and home equity?

Yes, there is. In fact, you have two options: refinancing the first mortgage that you have or taking out a home equity loan. Both of these can provide funds for whatever you need (debt consolidation, that vacation home, college tuition, and so on), and the better choice for you will depend on where you are with home equity, the interest rates at the time you need the loan, the terms of the loan, and your own situation and lifestyle. You need to have paid into your mortgage regularly for a number of years, or have made a hefty down payment at the point of purchase.

The first few years of your loan payments primarily satisfy the interest of the loan, so unless you have an open mortgage and are making additional payments against principal, you’re not going to build up a whole lot of equity to borrow against. However, if you do have a considerable amount of equity in your home and plan to put your house on the market within a few years, a home equity loan can be a smart way to add some liquidity without the higher interest rates of credit card debt or personal loans. It is also a way to refinance the debt and roll in some additional debt from credit cards if necessary.

If either a refinance or home equity loan will work for your situation, it’s worth noting that the cost of taking out a HELOC or home equity loan is significantly less than that for closing a refinancing loan. With the home equity options, some lenders will not charge any closing fees at all as a promotion to build business. Refinances are technically new mortgages, which means that all of the closing costs connected to a mortgage are in play, including title fees, points, processing the underwriting, appraisals, recording and legal fees.

Remember that to secure a mortgage that is more favourable to you than your current one, most mortgage lenders need to see you as a lower risk. To know more about this, contact us or get a copy of Carmen Costa’s book “The Reality of Mortgages”.