Should You Refinance or Use a Home Equity Loan?
Homeowners often reach a point where they need extra funds — whether it’s for home improvements, consolidating debt, or covering big expenses. When that time comes, two common options come up: refinancing your mortgage or getting a home equity loan. But how do you know which one is better for your situation?
Let’s break down the pros, cons, and key differences to help you make an informed decision.
🏠 What Is Refinancing?
Refinancing means replacing your current mortgage with a new one — typically to get a better interest rate, lower your monthly payment, or change the loan terms (like switching from a 30-year to a 15-year loan).
There’s also something called a cash-out refinance, where you borrow more than you owe and take the difference in cash.
Example:
If you owe $200,000 on your home but it’s worth $350,000, you might refinance into a new $250,000 loan, pay off the old loan, and pocket $50,000 (minus fees).
🧾 What Is a Home Equity Loan?
A home equity loan or HELOAN is a separate loan that lets you borrow against the equity you’ve built in your home — without touching your original mortgage.
It’s essentially a second mortgage with its own interest rate and repayment schedule.
Example:
Using the same $350,000 home with a $200,000 mortgage, you might take out a $50,000 home equity loan and make two payments each month — one on your original mortgage, and one on the equity loan.
🔍 Key Differences
| Feature | Refinance | Home Equity Loan |
|---|---|---|
| Replaces original mortgage | ✅ Yes | ❌ No |
| Interest rate | Usually lower | Usually higher |
| Loan terms | Can extend or shorten | Usually fixed |
| Closing costs | Often higher | Lower |
| Monthly payment | One | Two |
| Best for | Longer term | Shorter term |
✅ When Refinancing Makes Sense
- Interest rates are lower than when you first bought your home
- You want to lower your monthly payment
- You plan to stay in the home long enough to recoup closing costs
- You need a large sum of money and want just one loan to manage
💡 Bonus: A cash-out refinance almost always offers a better rate than a personal loan or credit card.
✅ When a Home Equity Loan Is Better
- Your current mortgage has an interest rate you don’t want to lose
- You only need a smaller amount of money
- You don’t want to reset the clock on your entire mortgage
- You need short term cash & don’t mind a higher rate
💡 Tip: If you’re using the funds for home improvements, the interest on a home equity loan might be tax-deductible. Talk to a tax advisor.
*We are not licensed nor able to give tax advice. If you’d like a great CPA give us a shout.
🧠 Final Thoughts
There’s no one-size-fits-all answer to whether refinancing or a home equity loan is better. It depends on your financial goals, your current mortgage rate, and how long you plan to stay in the home.
Before making a move, talk to a mortgage professional like ourselves who can help you run the numbers and see what makes the most sense.
🔧 Quick Checklist to Decide:
✅ Do you want a lower rate on your current mortgage? → Refinance
✅ Do you need cash but don’t want to touch your mortgage? → Home Equity Loan
✅ Want a single payment and possibly lower interest? → Cash-Out Refinance
✅ Only need a small amount of money? → Home Equity Loan
Have questions about your situation? Drop them in the comments or reach out to us any time for a free mortgage consultation. We’re here to provide expert guidance & support for you!
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