When homeowners need financial assistance, two popular options often come to mind: home equity loans and refinancing a borrowers existing mortgage loan. Both avenues provide opportunities to tap into your home's equity differently. Homeowners must consider their unique circumstances and goals before deciding between a home equity loan or a refinance.
In this article, we will explore the considerations between a home equity loan and a refinance, shedding light on the key factors homeowners should consider when making this important financial decision. By understanding the distinctions between home equity loans and refinancing, individuals can make an informed choice that best suits their current and future financial needs.
What is a Home Equity Loan?
A home equity loan allows you to borrow money using the equity you already have in your home without the need to sell or refinance your first mortgage.
Pros of a Home Equity Loan
Here are five pros of taking out a home equity loan.
- Access to funds: Home equity loans can be used for many purposes, allowing the borrower to access funds quickly and easily.
- Lower interest rates: These loans typically have lower interest rates than credit cards and personal loans, making them an attractive option for borrowers.
- Flexible & fixed repayment plans: Borrowers have different options on how they repay the loan by means of fixed repayment plans.
- Tax benefits: Home equity loans may provide tax benefits as the interest payments are often tax deductible.
- Closing costs: Home equity loans generally have lower closing costs compared to a traditional home refinance.
Cons of a Home Equity Loan
While a home equity loan has pros, there are a couple of cons to consider.
- Loan amount limitations: The maximum amount you are allowed to borrow with a Home Equity Loan is lower than a refinance.
- Additional mortgage payment: When you obtain a Home Equity Loan, you make another payment separate from your first mortgage payment.
What is a Home Refinance?
A home refinance is when you take out a new loan to repay your existing loan. This is a great option if you're looking to reduce your monthly payments, as you may be able to lower your interest rate, consolidate debt, and reduce your payments.
Pros of a Home Refinance
Here are a few pros of refinancing your home.
- Access to equity: When you refinance your home, you can access the equity you've built up in your home. This can be a great way to access additional funds for home improvements, investments, or other expenses.
- Lower monthly payments: Refinancing your mortgage can help you lower your monthly payments because, most likely you're refinancing to a lower interest rate and extending your repayment term, freeing up money for other expenses.
- Lower interest rate: When you refinance your mortgage, you can take advantage of lower interest rates subject to market conditions. This can help you save money in the long run.
Cons of a Home Refinance
Refinancing a home can be a great way to save money, but there are also cons to consider.
- Closing costs could add up: Refinancing your home involves closing costs, such as fees for the loan application, appraisal, title report, etc. These costs can add up quickly and can take time to recoup.
- It can extend your loan term: Refinancing your home often means extending the duration of your loan, which can result in more interest paid over time.
Home Equity Loan vs. Refinance
When evaluating a home equity loan vs. a refinance, it's essential to understand the similarities and differences.
Similarities
- Both home equity loans and mortgage refinance loans can involve borrowing against the equity in your home to access funds.
- Both home equity loans and mortgage refinance loans can be used for various purposes.
- Both home equity loans and mortgage refinance loans involve closing costs, although the costs for home equity loans are typically lower.
Differences
- Home equity loans can provide the money you need, while a refinance provides access to your home's equity by taking out a new mortgage.
- Home equity loans are typically shorter-term loans, while refinancing involves replacing your existing mortgage with a new one.
- Home equity loans typically have shorter repayment periods than refinance loans.
Explore Financing Options at ProFed Credit Union
After comparing a home equity loan to a home refinance and making the right choice for you, it's time to apply for the loan. Applying for a home equity loan or home refi can be done online in minutes. With lower interest rates, flexible terms, member benefits, and personalized service, ProFed may be able to help meet your needs and save you money.
ProFed Credit Union offers competitive rates and flexible terms on home equity loans and refinances to make the next step in your home journey hassle-free. We also provide various options to help you save money on your monthly payments.
It’s easy to start with ProFed Credit Union; schedule an appointment today.
