Some borrowers think of home equity loans and mortgage refinancing as the same thing but there are important differences. You should understand what your lender is talking about when mentioning either of these.
Most of the time when someone refinances their home loan they have some amount of equity in the home, which leads to some of the confusion in terminologies. Simple math to find equity is to take the current value of your home and negate the amount that you owe in principal. The remainder is equity. For instance, a home with a market value of $200,000 has equity of $50,000 if the owner still owes $150,000 on the principal.
The equity looks good on paper, but lenders don’t tend to lend the entire amount of equity on a home equity loan. Many loans are structured to lend only 90% of the current home value for mortgage refinancing or home equity loans.
In a mortgage refinancing loan, someone with a $200,000 home could only borrow $180,000, so the amount of equity dollars would just be $30,000 that could be used toward something else after the old loan was satisfied.
Anytime someone considers a mortgage refinancing, there is an option to finance as much of the home value as the lender will give and use the equity for something else.
Mortgage refinancing can be done by borrowing just enough money to repay the old mortgage and the closing costs, or the borrower can cash out some of the equity. A home equity loan is a second mortgage that the owner uses for whatever he chooses, but still has the original loan to pay for and the additional payment for the equity that is cashed out.
The decision to go with mortgage refinancing or a home equity loan depends on the individual and the terms of the loan. If the original loan had good terms and a great interest rate, it may be more sensible to keep that loan and get a home equity loan additionally for cash to reinvest in the home or anything else.
An important consideration in the decision is how easily another payment can be made along with the original mortgage payment. Sometimes it does not fit in a person’s budget, and mortgage refinancing is the best way to go.
Deciding on a home equity loan or a mortgage refinancing should be studied closely to determine which one offers the best situation for the individual.