Refinance Mortgage V/s Home Equity
Many people in dire need of cash and on a lookout for cashing in on their property tend to get confused between refinance mortgage and home equity loan. However, they need to understand that while they look the same on the outside, they are widely different and are meant to solve different needs. Let us first start with refinancing your mortgage.
As the word suggests, refinancing is about replacing the existing mortgage for another one. When talking about cash out, the only difference is that the new loan is for a higher amount than what needs to be paid for the initial loan. The difference in amount then, is the cash out amount. It is vastly similar to a normal mortgage. However, it does require a stipulated amount of closing costs to be paid against the old mortgage (an overhead). As such, they work well only in times when the interest rates on offer in the market are considerably low. The savings done on lower interest rates more than compensate for the total expenditure occurred as processing costs. The best part about this kind of loan is that the mortgager hereby has the option of repaying several loans and consolidating them all under one new loan. Nonetheless, it will only turn out to be profitable if the new loan (with lower interest rates) is carried out for some number of years so that the benefits can be reaped.
On the other hand, when talking about home equities, there is no need to repay the existing loans. On the contrary, it follows the concept of taking out cash against the same loan as a second mortgage. As such, the original loan remains as it is. A big advantage as far as equities are concerned is that the closing costs for these are very low. In such a scenario, it would be better to opt for this alternative in times when the interest rates in the market are sky rocketing. Being separate from the original loan, they can be repaid separately and do not become a burden on the original loan. Similarly, if a property needs to be sold off in a couple of years, home equity are a much better option compared to mortgage refinance.
Hence, it is unwise to say that one is better than the other. As already iterated, they both serve different purposes and are beneficial in their own ways. Because of this, when in dilemma of what to choose, the best thing to do would be to understand the purpose. For example, if the loan is being taken to revamp a property so that it can be sold for a higher cost, home equity is the option to go with. On the other hand, if the loan is being taken to revamp the house for a better standard of living, refinance is the right way to go ahead (keeping interest rates fixed). Think from all angles before making a choice. It would be stupid to take a wrong plan and then lament later.