Should You Refinance or Get a Home Equity Loan?

If you are considering a refinance, home equity loans could also be an option. Both options present you with an opportunity to get your hands on your home equity. However, the two are appropriate under different circumstances. Here are a few things to consider about refinancing and home equity loans.

Closing Costs

One thing that you will want to consider when looking at both options is the closing costs involved. If you do not wish to spend much on closing costs for the money that you need, a home equity loan will usually be your best option. When you refinance, you could potentially spend several thousand dollars in closing costs.

Long-Term vs. Short Term

Another big factor that you will have to consider is the amount of time that you need to pay off your loan balance. If you still have a large mortgage balance, this could take many years to pay off. When you get a home equity loan, you will basically be looking at two different potential rates. You will find that there are short-term home equity loans and long-term home equity loans.

When you look at short-term home equity loans, you will notice that the rates are quite a bit lower than what you can get for a long-term home equity loan. This means that if you have only a small amount of money to borrow, a short-term home equity loan would be your best option in most cases. You will have low closing costs as well as a lower interest rate. This will provide you with a smaller monthly payment and a shorter time until you have the loan paid off.

If you need a long-term loan, your best option will usually be to refinance. With a new mortgage, you can usually get a significantly lower interest rate than you could with a long-term home equity loan. It could potentially be a huge difference in your monthly payment as a result.

Favorable Mortgage Rates

Something else that you will want to consider is the rate that you have on your first mortgage. If you have a favorable rate on your existing mortgage, you may not want to pay it off with a new mortgage. For example, if you have a mortgage at 4 percent interest, it would not make much sense to refinance if the new market rate is 7 percent. Unless you have an extremely low mortgage balance, it would make more sense just to get a home equity loan for the amount that you need. Therefore, your monthly mortgage payment will not go up significantly because of the interest rate increase over your existing loan.

Prime Rate Considerations

Many home equity products, such as a home equity line of credit, are based on the prime rate. If you believe that the prime rate will stay low for an extended period of time, you could save significant money by using a HELOC. However, if you are afraid that the prime rate will rise, you may be better off with a traditional mortgage.