Did you know that Fannie Mae has estimated there will be over 6 million home sale transactions by the end of 2021? They also predict that homes will have appreciated 5.5% and that prices will rise another 2.6% in 2022.
It’s a good time to understand what a home loan is and when to refinance a home loan with the current rising prices.
If you don’t know much about loans, don’t worry. This brief guide will explain the differences between a home equity loan vs. refinance loan. Read on to better prepare yourself for homeownership.
What Is a Home Equity Loan?
A home equity loan will provide you with a set amount of money. The loan itself is secured by your home. You pay equal monthly payments over a fixed amount of time just like your mortgage.
These loans often have lower interest rates than unsecured loans because they are backed by your property. However, a lender can foreclose on your home if the loan isn’t paid off in time.
The amount that you’re allowed to borrow is typically no more than 85 percent of your home’s equity. Although, the total amount of the loan will depend on your current income, credit history, and your home’s current market value.
Make sure to check with multiple lenders to ensure you’re getting the best plan. Lenders will often lower fees and interest rates if they know they’re in competition for your business.
What Is a Refinance Loan?
There are two typical methods for a refinance home loan known as cash-out loans and rate-and-term refinancing.
A cash-out loan will pay off the remaining amount of your original home loan and replace it with a new loan. The new loan amount is for what debt remained from the first loan and what you’re cashing out from the equity.
Cash-out refinancing terms can be up to 30 years and often have lower credit score requirements. The interest rates can also be lower than a home loan in some cases.
A rate-and-term refinance is similar but does not require equity from your home. Its purpose is to change the interest rate, the term, or both for an existing mortgage without lending additional money.
Home Equity Loan Vs. Refinance Loan
The biggest benefit of a home equity loan over a refinance loan is lower and fixed interest rates. It’s also a good way to get a large sum of money quickly.
However, you must be able to pay the loan off quickly or risk losing your home. They also require excellent credit and substantial home equity. Also, if you sell your home you’re still responsible for the remaining balance.
The biggest advantage of a refinance loan is over a home equity loan is its ability to combine mortgages and consolidate debt.
However, refinance loans are best suited for those who intend to stay in their current home for a longer period of time. They also have high closing costs that range between 3–6 percent of the principal of your loan.
Which Loan Is Right for You?
Now you know when it comes to a home equity loan vs. refinance loan they both have benefits. It really depends on how much equity you have, when and what you need the money for, and how long you’ll be in your home.
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