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Home Equity Loan or Mortgage Refinance - Which is Right for You?


A common financial misunderstanding made by a number of homeowners and other consumers involves the difference between a home equity loan and a mortgage refinance. Many people mistakenly believe that the two are the same, but this is not the case. They are two very different types of loans and each has its own benefits and drawbacks as well as its own purpose. You don't want to do a mortgage refinance when what you really wanted to do was take out a second mortgage or home equity loans (the two are the same thing) and you don't want to take out a home equity loan when what you needed was a mortgage refinance.

What's the difference?

A mortgage refinance and a home equity loan differ greatly. In a nutshell, a mortgage refinance pays off your current mortgage and "refinances" the home. It means you start from scratch paying a 15 or 30 year mortgage, but usually at a lower interest rate. Conversely, a home equity loan is a new loan, a "second mortgage" taken out against the equity built up in the home. Obviously the differences between the two are extreme.

Which is right for me?

Whether you will want take out a home equity loan or do a mortgage refinance will depend greatly upon your particular circumstances at the time you decide to seek the loan. Are you locked in to a 10% interest rate when banks everywhere are offering 5% and you just want to get the rate lowered? Do a mortgage refinance. Are you in need of funds to purchase a new car, make repairs or improvements to your home, or pay your child's tuition? A home equity loan is the way to go.

Of course those examples are blatant. Sometimes there are needs that may require additional cash, but not in the amount that a home equity loan would provide. No one wants to go into debt for no good reason, so there's not a lot of reason to take out a second mortgage on your home if you don't really need to. If the capital you need can be freed up by making a smaller house payment each month, you'll want to do a mortgage refinance.

Sometimes there is no choice

The mortgage refinance option is only viable when the result will be a lower interest rate and/or a lower monthly payment. If this is not a possibility due to currently high interest rates or a bad credit score (There are bad credit refinance options, but sometimes people with poor credit can not get a lower interest rate than the one they are currently paying. Read how to refinance mortgage with bad credit here), then a mortgage refinance is probably not an option and you'll want to obtain a home equity loan if you need the funds for something like the situations listed above.

In most situations the choice between a mortgage refinance and a home equity loan will be obvious since the two loans serve such distinctly different purposes. It is important to know the difference, so you don't wind up seeking one loan when you really need the other. If you want to refinanace for a better rate, you can try . Or, to cash out your home's equity, you can get free quotes from .

 

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