To many people, there seems to be very little difference between a home equity loan and a refinance loan. However, there are some differences. You will find that a home equity loan, whether it looks like a more traditional loan or a line of credit, offers a little more flexibility. However, the refinance loan usually offers a lower interest rate. Both types of loans, however, have interest that is tax deductible. Make sure you understand the features of both before making a decision between home equity loans vs. refinance loans.
Home Equity Loans
Included in home equity loans are home equity lines of credit. You can decide how much of your equity you want to use as collateral for the loan. Equity is how much you “own” of your home. It is the difference between how much you have left to pay on your home loan and how much your home is worth on the current market. You can borrow part of your equity, or you can borrow all of it. Additionally, you can choose how you want to receive the money: as a lump sum or as a line of credit. This can allow you some flexibility. If you choose the line of credit, you don’t have to borrow up to the limit, but more is available if you need it.
Refinance Loans
While some of the accumulated equity in your home is used in a refinance loan, the loan is really meant to establish new terms for your loan. The entire mortgage is redone, and some of the accumulated equity you have can be added in for a “cash out,” where you take cash and your home is refinanced for an amount that is higher over all. You have no decision as to how to take your loan. It is lump sum. It is applied to “pay off” your “old” mortgage, and the remainder, the “cash out” portion, is given to you. Usually, it is possible to spread the terms out over a longer period of time than a home equity loan, and you usually end up with a lower interest rate.
Home Equity Loans vs. Refinance Loans: Which is Best For You?
You have to decide which would work best for you. If your purpose is to mainly to fix an interest rate or change the loan term to something longer or shorter, and maybe get a little extra cash to pay some bills or take a vacation, the home refinance loan may work best for you. However, if you are looking for flexibility, and you are not sure exactly how much you need, a home equity loan, in the form of a line of credit, might be your best option. Do your research, though, and shop around for a loan that suits your specific needs.
By: L. Sampson
Posts Tagged ‘Traditional Loan’
Home Equity Loans vs. Refinance Loans
January 30th, 2010Interest Only Vs Traditional Refinancing Loans
November 6th, 2009
If you are thinking about refinancing your home, two types of refinancing loans you should look into are Interest Only and Traditional Refinancing Loans. Here are some tips.
Traditional Refinancing Loans
The most common type of refinancing loan is the traditional loan. A refinancing loan is a new loan that replaces an older loan, using the same property as collateral. Refinancing your home mortgage will completely revamp it giving it a new monthly payment, payment terms and length of the loan. The most beneficial aspect of traditional refinancing loans is that they usually have low fixed interest rates.
Many homeowners can purchase homes at times when lenders only close on mortgages with high interest rates, by refinancing your loan, you can lower your interest rate and ultimately pay less per month for your mortgage. Traditional refinancing loans are extremely similar to primary mortgage loans and are considered very conservative loans that have limited risk to the lender. Because of the reduced risk, interest rates for traditional refinancing loans are usually the lowest.
Interest Only Refinancing Loans
An interest only refinancing loan gives the homeowner the option of paying a lowered monthly mortgage payment. A traditional refinancing loan combines the principle of the loan with the interest part of the loan in each monthly payment; however an interest only refinancing loan gives the homeowner the option of just paying the interest amount and deferring the principle until a later date.
It is important to note that financially savvy homeowners can take advantage of these lowered monthly payments. While it is not a good idea in general to only pay the interest of your loan just to lower your payment, for certain homeowners, paying only the interest increases cash flow for other uses. For instance, you might want to take that money and invest it into a 401K, pay for a child’s tuition or use it for Christmas gifts. Interest only refinancing loans give you the added option of doing more with your monthly mortgage payments.
It should be noted that most interest only refinancing loans only give you the option to defer the principle for a set term, for example the first 10 years of the loan.
If you are thinking about refinancing your home, make sure you look into the many different refinancing loan products available from your lender. It is important to carefully consider each product to determine which one best fits your needs.
By: Connie Barker