Refinances vs. Home Equity: What is the Difference?
By Space Coast Daily // September 21, 2020
Refinance vs. Home Equity Loan
If you’re considering tapping into your home’s equity to consolidate bills, save money as well as do home refurbishing, there are primarily two choices to consider, a full refinance or a home equity loan.
While each option can benefit you, it is vital to compare each two to make the best choice.
What is Home Equity?
Home equity is a kind of another or second loan which one can take out besides the direct loan. Also, some equity lines of credit are the same. However, provide borrowers a line of credit, which you can lend against instead of the whole amount of the loan upfront.
Like for instance, the value of your property is USD250, 000. You have an outstanding debt of USD180, 000. The difference in cost between your loan balance and the value of your property is USD70,000- this is your home equity. You can take out a home equity loan to access a portion of your balance in cash.
How Does Home Equity Work?
A home equity loan is a second loan; it works much like the first one. You will pick a loan lender, fill out a form, send documents, wait for the approval, and then close the mortgage. You will get a payment ( lump sum) for your loan amount that you will pay back every month as you did with your first loan. Normally, you will have to pay back the loan in 15 years or sooner. It all depends on the term.
What are the Costs?
In general, a home equity loan has a higher rate compared to a refinance loan; this is because it is a second-lien mortgage. So meaning, once you fail to pay the loan, the loan lender on your first loan has the first claim to the property- and not the lender of home equity. This makes it a higher risk. So, high-interest rates provide loan lenders additional security and protection.
What is a Refinance Loan?
Not like a home equity mortgage, a refinance is not a second-lien loan, rather replaces the current home loan. Once you refinance into a long-term mortgage or a low-interest rate, it could mean a small payment every month and less interest disbursed in due course. Also, you can refinance to exchange from an adjustable-rate loan to a fixed-rate loan so that you can lock in a low rate for the long haul.
Cash-out refinances, on the other hand, are far different than usual refinance in that borrowers can tap part of the home equity they have through taking a large loan, bigger than the existing balance.
Like for instance, the value of your property is USD250,00, and you have a remaining balance of USD180.000. In a usual refinance form, you can take that balance and spread it in a new thirty years period that can lower your payment every month.
In most instances, you may even wish to make use of your refinance for consolidating higher interest. If you have a remaining balance on loans or credit cards, you can utilize the refinance mortgage to pay off these debts, rolling them into your balance and spreading out the repayment cost in due course. The fact that loans usually have low-interest rates compared to car loans and credit cards; this saves you a lot in due course.
How Refinance Loan Work
The fact that this loan substitutes the current loan, you will not be acquiring a second loan payment. However, the current reimbursement will change. It depends on the rate of the interest you qualify for, the time of the loan you opt to, as well as the amount of money you take out, the payment can be lower or higher. Like a traditional loan, you can pick to repay the refinance over fifteen or thirty years.
Applying and Costs
In general, a refinance loan is easier to apply and qualify as it is a first-lien mortgage. So, meaning loan lender has an initial claim to the property once you fail to pay the loan. Even if it comes with low-interest rates compared to a home equity, it will not essentially be a lower rate than your existing loan.
Refinance vs. Home Equity Loan: Breakdown of Differences
• Replaces the current loan
• Can be repaired more than fifteen or thirty years
• Easier to apply and quality
• Low-interest rates
• Used to consolidate high-interest credit
• Provide a lump sum. It depends on the home equity you have
Home Equity Loan
• Serve as a second lien loan
• Hard to qualify
• Have to paid back sooner
• High-interest rate
• Provide lump sum, based on home equity
• Usually closes faster
The Process of Application
As with a traditional loan application process, you will have to give lots of personal and financial papers during the process of application for both a refinance and home equity. These take account of W-2 statements, Social Security numbers, proof of employment history, and many others. Also, you might need info like recent loan statements, liens against your home as well as evidence of property valuation.
Which is Best for me?
Both refinances, and home equity loans could have financial perks. To know the best choice for you, you will need to consider your home equity loan and your objectives, chosen repayment timeline as well as how long you plan to stay in your property.
Despite which kind of loan you settle on, make sure to look around to get the best rate because rates and closing costs differ to a greater extent from one loan lender to another.