Your beloved home presents many advantages, from a peaceful dwelling place to investment and the ability to offer cash when you’re in great need. Home equity loans and refinance mortgages are the most popular ways to acquire finances from an existing home.
Home equity loans and refinance mortgages can significantly benefit homeowners who wish to convert their home equity into cash for different needs. Hopefully, the best information will successfully guide you through the best move.
Even better, you can acquire an experienced financial advisor or accountant to take you through the entire process for more excellent results. For financial planning and wealth management, feel free to drop us a line, and we will be happy to serve you.
While they perform similar purposes, home equity loans and mortgage refinance differ in various dimensions that this blog will highlight.
Home Equity Loans vs Refinance Mortgage
The most apparent difference in nearly any term is reflected through the definition. A home equity loan is an additional loan different from your existing mortgage, borrowing against the home’s equity. On the other hand, refinance mortgage is when a homeowner replaces their current loan with a new one that comes with better terms.
Besides their definitions, home equity loans and mortgage refinance differ in many other aspects, including repayment terms, requirements, loan limits, interest rates, loan fees, pros, cons, types, and more.
Home Equity Loan
Now that you understand a home equity loan, you can confidently learn how it differs from a refinance mortgage. Most lenders of home equity loans allow their clients to borrow up to 80% of their home’s value, but others may increase the limits to 85% or 90%.
The interest rates for this loan differ among different lenders, although many offer an average of 7% per annum. In addition, home equity loans are fast loans, repayable between 5 to 20 years. The repayment period isn’t fixed but varies within different lenders after various considerations and a mutual agreement.
Home equity loans contain closing costs, although some lenders may cover the costs when necessary. In nearly all countries, home equity loans are tax-deductible, more so if you use the finances to enhance your home’s well-being.
Home Equity Loan Requirements
The requirements for a home equity loan are at least 15%-20% equity in your property, a reliable credit score between 600 and above, a stable income history for at least two to three years, and a low DTI (debt-to-income) ratio. However, even if you meet all the above requirements, you cannot borrow 100% of your home equity since most lenders allow between 80% and 90%.
Number of Home Equity Loans
Furthermore, you can confidently acquire more than one home equity loan on a single property, remembering that every loan comes with the terms of a new loan. The move isn’t advisable as the subsequent loans have lower limits and higher interest rates.
Another aspect differentiating home equity loans from refinance mortgages is the form of loans acquired. With home equity loans, borrowers can choose between home equity lines of credit (HELOC) and fixed-rate loans.
Refinance mortgage allows homeowners to replace their existing loan with a new and more favourable one when needed. To refinance a mortgage, homeowners require a minimum of 20% equity in their home’s value, an adequate credit score between 600 and above, reliable income information lasting at least two years, and a low DTI ratio.
However, mortgage refinances borrowers who can still access the loan with less than 20% equity accompanied by a good credit score, although such loans attract higher interest rates.
With refinance mortgages, borrowers can enjoy lower interest rates for the new loan, making it a more affordable way of borrowing in a financial emergency. The long payback period makes a refinance mortgage more accommodative than home equity loans.
Additionally, refinance mortgage attracts closing costs, varying from one lender to another, which include credit check fees, title fees, prepaid property taxes, appraisal fees, and loan origination fees, adding up to 2%-5% of the total loan.
Mortgage refinance lenders barely cover the closing costs for their clients, meaning the borrowers cater for the expenses besides their new mortgage. Regarding the repayment terms for a mortgage refinance, most lenders offer a 15-30 years payback period, with fixed or variable interest rates of 5%-6%.
How to Borrow
Borrowers of mortgage refinance can acquire up to 100% of their home’s value, although most lenders offer a maximum of 80%. The forms, pros, and cons are other features that contrast mortgage refinances from home equity loans.
Types of Refinance Mortgage
Refinance mortgage comes in various forms, including cash-out, cash-in, rate and term, VA streamline, reverse mortgage, short, and no-closing-cost, depending on how, when, and to whom the loan is offered.
Borrowers also enjoy a wide range of options, helping them choose the one that best suits their financial needs. Although, the move may be unfavourable in cases where the entire economy or many lenders charge high-interest rates for nearly all loans.
Moreover, your credit score might deteriorate since you’re replacing an existing loan with another one. Remember that refinance mortgage comes with various closing costs, which increases your expenses on the newly acquired loan.