What is the difference between home equity loan and refinance

Q: What is a major advantage of a home equity loan?

Pro #1: Home equity loans have low, fixed interest rates. Itll typically come with a lower interest rate than youll get when taking out a personal loan or a line of credit.” Financial institutions dont charge consumers as much to borrow money when collateral secures the loan.

When to choose home equity financing

A home equity line of credit (HELOC) is a revolving line of credit that you can access now and into the future if necessary. With a HELOC, you'll have access to a revolving line of credit that can help you manage large expenses as they arise—and you'll only pay interest on what you borrow. Compared with a mortgage refinance, where you receive a large lump sum of cash, a home equity line of credit may have a lower cost of borrowing.

Table of Contents Show

When to choose home equity financing
When to choose a mortgage cash-out refinance
Is home equity loan cheaper than refinancing?
Is refinancing and home equity the same thing?
Is it smart to use a home equity loan?
What is a major advantage of a home equity loan?

On the other hand, a home equity loan may be best if you need a large lump sum of cash and have a lower mortgage rate than what you'd get with a new mortgage. Home equity financing can offer lower interest rates (because it's secured by the equity/ownership you have in your home) with minimal closing costs and fees. If your mortgage refinance comes with a big increase in your interest rate, and depending on how high the interest rate is and how much cash you take out and your closing costs and fees, a home equity line of credit may offer a lower cost of borrowing.

Learn more about the differences between home equity loans and lines of credit

When to choose a mortgage cash-out refinance

Choose a mortgage refinance with cash-out to secure the lowest variable and fixed rates available if you need a large lump sum of cash. Furthermore, the expansive suite of mortgage loan options allows you to shop for the solution that meets your needs—now and in the future. You'll pay higher closing costs and fees with a mortgage cash-out refinance, but it's possible that these are offset by the competitive interest rates available in today's market. Just make sure you have a need for all or most of the cash you're getting and compare the total of your new mortgage with alternatives.

Learn more about mortgage refinancing

Do you want to convert the equity in your home into cash in your hand? There are a few good options. The tricky part is knowing the difference between the types of loans that are available.

Home equity loans best suit borrowers who have a substantial amount of equity available to them. You can determine the total amount of equity in your home by subtracting any and all debts secured by your house from the current fair market value of your home. The amount left over is the total equity, or value of ownership, of your house.

Usually, the amount you can borrow is determined by your credit and combined loan-to-value (CLTV) ratio. Your CLTV is your desired home equity loan amount plus your existing mortgage balance, divided by your home’s value. Your CLTV must typically be under 90 percent. When you add a second mortgage to your home, your original mortgage remains unchanged, but you will have two mortgage payments.

The cash-out refinance loan is a loan that refinances your first mortgage into a larger mortgage which allows you to take the difference in cash.

Assuming you have an adequate amount of equity in your home, a cash-out refinance loan enables you to:

Pay off your existing mortgage.
Negotiate a new term, rate and repayment schedule for your consolidated loan amount.
Obtain a new mortgage in the amount of your existing mortgage, plus the additional amount you want to borrow.
Receive the additional amount in a lump sum.

When you elect to use a cash-out refinance loan to tap your home equity, you enter into a whole new loan agreement. This means the terms, rate and repayment plan for your new mortgage will be different.

Generally, cash-out refinance loans offer up to 30 years for repayment, and you can choose between a fixed or adjustable interest rate. You may even be able to take advantage of potential tax savings depending upon how you are using the “cash-out” portion of your loan (e.g. home improvement). Consult your tax advisor for more information.

The primary difference between a cash-out refinance loan and other home equity loan options is that a cash-out refinance loan converts one mortgage into a separate larger one. Other home equity loan options, typically, create a second mortgage on your home.

With a traditional home equity loan, you take on a second mortgage at a fixed rate with up to 30 years for repayment. One thing to consider is the fees associated with each loan. Cash-out refinancing may have fees and closing costs since you are changing your loan. Discover® Home Loans offers both home equity loan and cash-out refinance options. With Discover, there are no origination fees, application fees, or cash due at closing.

So, how do you decide?

The best way to determine which type of home equity loan option is best for you is to speak with a Discover Home Loans Personal Banker who can evaluate your individual needs. Call 1-855-361-3435 today!

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Home Equity Loan vs Cash Out Refinance

Is home equity loan cheaper than refinancing?

Shop rates and compare closing costs: Home equity loan rates are typically higher than mortgage rates, but often have lower closing costs than a refinance loan.

Is refinancing and home equity the same thing?

A cash-out refinancing pays off your old mortgage in exchange for a new mortgage, ideally at a lower interest rate. A home equity loan gives you cash in exchange for the equity you've built up in your property, as a separate loan with separate payment dates.

Is it smart to use a home equity loan?

A home equity loan could be a good idea if you use the funds to make home improvements or consolidate debt with a lower interest rate. However, a home equity loan is a bad idea if it will overburden your finances or only serves to shift debt around.

What is a major advantage of a home equity loan?

Pro #1: Home equity loans have low, fixed interest rates. “It'll typically come with a lower interest rate than you'll get when taking out a personal loan or a line of credit.” Financial institutions don't charge consumers as much to borrow money when collateral secures the loan.