Home Equity Loan or Refinance?

Choosing Between Refinancing and a Home Equity Loan

As a homeowner, you probably know already that your house is not just your place of residence or an investment. It’s also an asset you can use when you need cash for major emergencies or funding for home repairs or upgrades.

To get the funding you need, you typically have two basic options: taking out a home equity loan or refinancing. If you’re deciding between getting a home equity loan or refinancing, below are some key differences you need to consider.

Refinancing and home equity loan – key differences

With refinancing, you’re actually ending your current mortgage and taking a new one. If you switch lenders to refinance, your new lender would be paying out your original loan to close the mortgage with your previous lender and place their own mortgage over your property.

A home equity loan, on the other hand, gives you access to cash after you have built enough equity in your property. It is usually treated as a separate loan that you can avail of on top of your mortgage as long as you have sufficient equity. The usual requirement is to leave at least 20 per cent of equity in the property, which means you can only borrow up to 80 per cent of the equity value. 

Refinancing and home equity loan – points to ponder

Beyond the key differences between refinancing and home equity loans, here are some important points to remember about refinancing and getting a home equity loan:

Refinancing may offer lower interest rates and be more manageable

While taking out a home equity loan may offer you greater flexibility than refinancing through a mortgage, your home equity loan may be subject to a higher interest rate.

With refinancing, you would usually get the new mortgage at a lower interest rate since you’re using your home as security for the new loan. By refinancing, you can focus on paying just one loan, so some find it easier to manage than a home equity loan. With refinancing (where you take out a principal and interest loan), as long as you keep making your repayments promptly, you’ll be able to pay off the full amount over time.

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A home equity loan may work as a line of credit

Although a home equity loan broadly refers to any loan that allows you to borrow against your property equity, most home equity loans work as a line of credit – meaning they work differently from conventional mortgages or home loans.

Instead of borrowing a lump sum, a home equity loan that comes as a credit line allows you to borrow a specific amount and it’s up to you to choose how much of it you use and what for. You are then charged with interest only on the amount you use, and you may also have a much longer repayment period.

But then, if you are only able to make minimum repayments, you would need to pay back a substantial amount of money all at once when the loan reaches its maturity date. Therefore, managing a home equity loan successfully requires a lot of financial discipline.

Whether you opt for refinancing or a home equity loan, it’s best to discuss your needs and situation first with seasoned lending experts who are well-versed with the different types of loans.

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It could be as simple as you need access to a loan to complete a transaction, or just a sounding board for an idea. It could be that you want to plan the growth of your business and see how debt and finance can help you get where you need to be. Whatever the case may be, it certainly doesn’t hurt to pick up the phone and have a conversation with us.