Home Equity vs. Refinance

For many consumers it can be difficult to make the decision between obtaining home equity vs. refinance loan. The two sound quite similar; however a home mortgage refinance loan is very different from a home equity loan. One of the biggest differences between these two types of mortgage financing options is in the reasons why the homeowner wants to change their mortgage loan.

Homeowners who need to get their hands on some extra cash may be better served by the home equity option. This financing strategy allows the homeowner to tap into the equity in their home and get cash in one of two ways. The first home equity option allows the homeowner to receive a lump sum payment that they can use in numerous ways such as college tuition, home improvements or a major purchase such as a car or even taking a vacation. The second home equity option, known a home equity line of credit, allows homeowners the flexibility of being able to access a specific percentage of their home’s equity whenever they want. If the homeowner does not need any of the money from their home equity line of credit right away, they don’t necessarily have to make a withdrawal. Should they see six months down the road, however; that they need some extra money they have the flexibility to take it out of their home equity line of credit. The homeowner will only be responsible for paying back the actual amount of money that they withdraw and they only have to withdraw what they need.

A home mortgage refinance loan, on the other hand is very different. Although some mortgage companies do offer a cash out refinancing option, in most cases homeowners choose to refinance their home for one of two reasons. Either they want to take advantage of interest rates that are lower than they were when the homeowner first took out their mortgage loan or they want to be able to reduce their monthly mortgage payment by financing their mortgage home for a longer time. In some cases homeowners want to reduce the amount of total time on the term of their mortgage loan by either increasing their payments or reducing the interest rate.

In addition, homeowners may choose to take on cash out refinancing, in which the refinanced mortgage is larger than the balance due on the original loan. The difference is backed up by the home’s existing equity and is paid to the homeowner as a lump sum.

Both the home equity loan and various refinance options have advantages for consumers. It is up to the consumer, however; to make the final decision between the home equity vs. refinance; based on their individual situation, needs and preferences.