Using the equity built up over time in a home purchase is one option for persons who require a cash resource. Home Equity vs. Refinance is the “which is best” question many ask after they have made the decision to tap into their equity. There are important differences between these two financial tools that should be considered prior to making a decision about which to use.
What is Equity?
Equity is the difference between fair market value of property and any remaining balance on mortgages or liens against that property. For example, if a home is worth $250,000 and the homeowner still owes $200,000 on their mortgage, the amount of equity in that home would be approximately $50,000.
What is Refinance?
Refinance is a method of manipulation of a current mortgage to either obtain cash out of equity built up in a property or to obtain lower rates and/or a longer term in which to repay an existing mortgage.
Why use equity money instead of refinancing property to obtain cash?
For many persons, using home equity is a better choice than a refinance of an existing mortgage. Which is best ultimately depends upon what the purpose is for adjusting a current financial situation and how much cash is needed. Home equity line of credit (HELOC) loans normally have a reasonably low interest rate versus other types of loans. HELOC is better if an existing mortgage has a low interest rate.
A refinance of an existing mortgage may be preferred if a large amount of cash is desired, and repayments can be spread out over a longer time. Refinance loans are a good way to obtain a lower rate than exists with an old high rate mortgage.
How do rates and terms compare?
1. HELOC loans are shorter term and have the advantage of lower rates and no closing costs, which may be several thousand dollars. Refinance loans are longer term, so payments are lower but spread over a much longer time period.
2. Home equity loans can be set up as either a true line of credit or as a bulk amount of cash out. Lines of credit have variable interest rates, and the homeowner can use it like a credit card for just the cash needed at a particular time, up to their limit. A bulk amount is like an installment loan, with regular same payments over a set time.
3. Most home equity loans are for 10 to 15 years; refinance loans are a mortgage over 30 years. Refinance mortgage rates are currently significantly less than HELOC rates.
Home equity vs. refinance – which is best?
Which is the best option depends upon the homeowner’s needs and the financial market. For very large amounts, refinance is generally best for long term borrowing. For short term or smaller loan amounts, home equity is the best option.
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