Should I refinance or consider a home equity loan?

For most people, a mortgage payment is among their largest monthly expenditures. And while owning a home can be a huge expense — it is also a huge asset. Building equity in a home allows homeowners the flexibility to tap into cash for major expenses or restructure the terms of their loan to decrease monthly payments by refinancing or obtaining a home equity loan.

Refinancing an existing mortgage loan recalculates the amount you still owe on your home for a shorter or longer period of time with a different interest rate. Homeowners can choose to extend their loan term to lower monthly payments or reduce loan terms to pay a mortgage off more quickly.

A home equity loan utilizes the equity you have in your house to provide a loan for a period of time. A home equity loan is a fixed rate, fixed payment loan against your home, typically a second lien behind your first mortgage. Payments made toward a home equity loan are separate and do not disrupt your current mortgage payment schedule.

Who is the best candidate for a home equity loan?

Using the equity you’ve accumulated in your home, a home equity loan allows homeowners to borrow funds for things like:

1. Home renovations
2. Building an addition on your home
3. Building a garage
4. Major home repairs (like replacing a roof)
5. College education expenses

With a home equity loan, there are no surprises. Borrowers can expect a consistent interest rate, payment amounts don’t change, and when the loan repayment schedule reaches maturity, the loan is paid off.

Who is the best candidate for refinancing?

The best candidate for refinancing is someone whose current mortgage has a variable or adjustable interest rate. Refinancing provides a fixed rate mortgage, removing the risk of rising interest rates. A few other situations that make someone a good candidate for refinancing include:

1. Increased income – If your income has greatly increased since you purchased your home and you can afford higher monthly payments, a refinance can lower your loan term. This will allow you to pay off your home more quickly and reduce the amount of interest paid to the bank over the life of the loan.
2. Unemployment, loss of wages or single-income households – A refinance can help homeowners who have lost employment or wish to go from a two- to a one-income household. This is common in the case of couples deciding that one parent will stay home to care for a child. By refinancing, borrowers are able to lower their monthly payments by extending their loan term.

Next steps

If you’re considering a refinance or home equity loan, you’ll want a local lender, like us, that provides both of these financing options. Be prepared to tell them why you’re seeking additional financing, your current income and how long you plan to remain in your home. Ask about loan payment options, any prepayment penalties, what the loan will cost and how long it will take to recoup those costs.

Lean on their expertise to help determine which route is the best fit for you based on your goals. While we hope you choose us, the lender you choose should be a resource in helping you make the final decision.