Can you believe your house is more than just a home? It is an investment, and also a source of money ready to help with repairs, upgrade and emergencies or any cash shortages you may have. You can get this money through refinancing a mortgage or through a home equity loan. Are you wondering what the difference is, and which would be better for your financial situation? Let’s take a look at each of these options.
What is Home Equity and What does Home Equity do?
First, what is home equity? Home equity is the market value of a person’s home, excluding any liens that may be attached to it. It is the personal wealth you hold in your home, the accumulated value. Home equity is an asset you can use to borrow against. Home equity, simply put, is a second mortgage secured by your house, where you borrow money using your home as collateral.
To figure out how much equity you have, see what you still owe on your mortgage. Then find out what your home’s value is. The resulting difference is the equity amount of your home.
Home equity builds from paying down your home’s mortgage loan, as well as the buildup of property appreciation over time. You can always sell your home to get equity turned into cash, but there are alternatives to get the funds without selling.
What is Refinancing a Mortgage?
Refinancing is when you renegotiate the old mortgage loan and select new terms. The new loan usually has better terms so it improves your finances greatly. Refinancing pays off and replaces the old loan. The new, refinanced mortgage loan will usually have lower monthly loan payments. You can refinance your mortgage as often as you need to, however, make sure it makes sense for your financial situation.
What can Refinancing a Mortgage do?
Refinancing a mortgage is often used to lower your monthly interest payments. This will save you paying on interest. A refinanced mortgage can also be used to pay off other loans faster, and can also consolidate debts. Refinancing a mortgage will save you money, build equity, and pay off your mortgage faster.
What Is a Home Equity Loan?
In a home equity loan, you receive a one-time lump sum from your lender. Once you receive the money, you need to start repaying at a fixed rate. If you need to, you can use the equity to take out money. This helps in the case of sudden needed repairs, or education fees.
Comparing Home Equity Loans and Refinancing
Refinancing your mortgage and home equity loans both give homeowners the ability to get cash based on their home’s equity. For both, refinancing your mortgage and home equity loans, you can use the money you get for any purpose you want or need. Usually, it is recommended to use the funds for home improvements that add value to the house, or for much needed debt consolidation. Remember, for both, your home is collateral, so if you fail to make payments, it could lead you to foreclosure.
A home equity loan may be the better choice if you need to borrow a large amount of the home’s value, or when you can’t get a lower rate when refinancing. Monthly payments can turn out to be higher, but you will pay less interest. Home equity loans are great for people in need of a substantial amount for a particular purpose. Remember, with a home equity loan, you will make monthly payments on top of your usual mortgage payment. Home equity loans are fast and easy process than that compared to a refinancing of your mortgage, and have a shorter repayment period.
Refinancing can be a better idea if you plan on staying in your home for many years. This will allow you to take advantage of lower monthly payments. Refinancing your mortgage allows you to get access to your home’s equity at the same rate as your mortgage. Be aware, refinancing replaces the old loan for a new one that is great that what you had. Refinancing usually has lower interest rates, and can have a repayment period of around 30 years. You get to choose the length of the term when you refinance the mortgage.
When trying to decide if you should refinance your mortgage or use a home equity loan, it is always best to discuss with a mortgage broker. Our mortgage brokers can see what would be more beneficial to you and your financial situation at this time. Make sure to get in touch with us today to discuss whether a mortgage refinance or a home equity loan is the best for you.