Refinancing Loans Vs. Home Equity Loans

If you are a homeowner, there are many loan products that can work to your advantage; sometimes the most difficult part is picking the right product that fits your needs the best. Two loan products that are extremely popular are refinancing loans and home equity loans. Here is some information on both their similarities and differences.
Refinancing loans is usually the process of taking out a second loan in order to pay for the older loan, using the same property as collateral. The major advantage for refinancing your home is to benefit from a lower interest rate or better terms. Many homeowners purchase homes when they either had a lower credit score or when the market offered only higher interest rates. If your current credit score has improved or the banks and lenders are offering much lower interest rates, a refinancing loan may be a great way to lower your monthly payments, effectively reducing the amount to repay.

A home equity loan is similar to a refinancing loan in that you use your home to secure the loan and if you fail to repay the loan, the bank can sell your home to recoup its losses. However, home equity loans are usually not for the entire value of the home, but only for the equity (equity is the current value of your home, less any debt). For most homeowners, the use of home equity loans is different than refinancing loans. Homeowners take out equity loans to make big ticket purchases such as additions to a home, tuition for college or to renovate a kitchen. While there are cash out options for refinancing loans, most refinancing loans are to save money and not to use the equity that has appreciated on their property.

Home equity loans are usually a little less expensive, due to the fact that less money is being loaned. While fees such as closing costs and the appraisal are similar to a refinancing loan, there are usually no points involved. For refinancing loans a fee called points can be requested by the lender or bank. A point is usually equal to 1% of the loan amount and it is not uncommon to be charged by the lender 2, 3 or more points to refinance a loan.

The great part about being a home owner is the many options that are available to you; however, it is always important to make sure you consider all your options to find the one that best fits your needs.

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