You’re thinking about refinancing, but you’re not sure whether to go for a home equity loan or a standard refinance. What’s the difference between the two, and when should you choose one over the other? Let’s break down those questions and get into real-world scenarios where one option might be better than the other.
Refinancing: The Bigger Picture
Refinancing is a much broader term because there are various types of refinances—home equity loans, rate-and-term refinances, and more. Let’s talk about when you might want to choose one over the other.
It all comes down to your purpose and intention. What are you trying to achieve with your new mortgage? A “normal” refinance (also known as a rate-and-term refinance) means you’re changing either the rate, the term, or both.
Reasons to Consider a Normal Refinance:
- Save money. You might refinance to reduce interest payments, drop mortgage insurance (MI or PMI), or secure a lower rate.
- Shorten the loan term. Even if the new rate is higher, shortening your term from 30 years to 15 years could help you pay off your mortgage faster. You’ll save money in the long run, even with a slightly higher rate.
- Create cash flow. Sometimes, people refinance to free up some monthly cash. Resetting the mortgage clock back to 30 years often lowers the monthly payment, which can help if your budget is tight.
Mortgage Mark Tip: Cash flow and savings aren’t the same thing. Reducing your payment might not save you money overall, but it can help with your monthly cash flow, which is essential if your financial situation changes.
Home Equity Loans: Tapping Into Your Equity
Now, let’s talk about home equity loans. Should you do it or not? A home equity loan means you’re borrowing against the value of your home without changing your primary mortgage. This is often a good option if you want to keep your current mortgage intact and still access cash for something specific.
When Home Equity Loans Make Sense:
- Paying off bad debt. If you have high-interest credit card debt, a home equity loan can be a way to consolidate that debt into a lower-rate loan.
- Paying off larger loans. Car loans, for example, usually have big monthly payments. Paying off your car with a home equity loan can free up cash flow each month, even though it’s not necessarily “bad” debt.
- Starting a business or home improvements. Maybe you need cash to expand your business or tackle some major renovations at home. Both are good reasons to tap into your equity.
- Consolidating debt. If you’re juggling multiple debts—credit cards, car loans, student loans—consolidating them into one payment might not save you money, but it can simplify your finances.
- Forced to refinance. Maybe you need to refinance due to a divorce or other legal obligations. A home equity loan could be necessary if the court requires you to pay someone off.
Understanding Your Goals
Before deciding between a refinance or a home equity loan, ask yourself these questions:
- Do I want to lower my monthly payments and secure a better interest rate?
- Am I trying to keep my current mortgage rate while accessing extra cash?
- How long do I plan to stay in my home?
Answering these questions will help you figure out which financial option is best for your situation.
When Refinancing Is Ideal
Refinancing replaces your current mortgage with a new one, potentially with a lower interest rate or a shorter term. This is a great choice for homeowners who want to optimize their monthly payments for the long haul.
Scenarios Where Refinancing Shines:
- You want to reduce your interest rate and/or shorten your mortgage term.
- You’re planning to stay in your home for the foreseeable future.
- You want to roll high-interest debt into one lower monthly payment.
Mortgage Mark Tip: Even if mortgage rates are higher now than when you first locked in, crunch the numbers! Refinancing could still make sense depending on your equity and overall financial goals.
Real-World Example: Refinancing
Let’s say you’re a few years into a 30-year mortgage and your financial situation has improved. Maybe you got a pay raise or you’re thinking about retirement. Refinancing into a shorter term, like a 15-year mortgage, could help you pay off your home faster, even if the rate is slightly higher.
Some people might argue that you can just pay extra toward your mortgage each month without refinancing. While that’s true, refinancing into a shorter term forces you to make those higher payments, which can keep you on track to pay off your home sooner.
When a Home Equity Loan Is Ideal
On the other hand, a home equity loan allows you to borrow a lump sum of cash without changing the terms of your current mortgage. This is great if you need a specific amount of money for a one-time expense, like a home renovation, paying off debt, or starting a business.
Scenarios Where a Home Equity Loan Is Ideal:
- You want to keep your current mortgage intact and just access cash.
- You’re comfortable with taking on a second loan payment.
- You need cash for a large expense, like home improvements or college tuition.
Mortgage Mark Tip: While leaving your primary mortgage untouched might be appealing, remember that home equity loans often come with higher interest rates than refinancing. Make sure you calculate the total cost before moving forward.
What’s Right for You?
If you’re focused on long-term savings and restructuring your mortgage, refinancing might be the better option. But if you need cash now and don’t want to alter your current mortgage, a home equity loan could be the way to go.
Either way, it’s crucial to crunch the numbers and understand the full picture before committing. That’s where we come in! At Mortgage Mark, we can offer personalized insights based on your situation. We’ll help you weigh the pros and cons and make the most informed decision.
Need Help?
If you’re still unsure, call us! The Mortgage Mark team is here to walk you through your options. Every situation is unique, and we’ll help you figure out whether refinancing or a home equity loan is the right move for you.
Thanks for reading, and remember—when you think mortgage, think Mark!
Mark Pfeiffer
Branch Manager
Loan Officer, NMLS # 729612
(972) 829-8639
MortgageMark@MortgageMark.com
Mark Pfeiffer is a Mortgage Loan Originator with CMG Home Loans and a veteran of the mortgage industry since 2003. Mark is responsible for ensuring all loans originated by the Mortgage Mark Team offer competitive terms and close on-time.
We assist clients with all type of mortgage loan programs