Home Equity vs. Refinancing: Which is Right for Me?

Home ownership has a lot of perks.

You can make renovations and stylistic changes at your leisure, drastically change the layout, and even re-do the backyard completely.

You do not have to rely on a landlord to make house repairs, and, in the long run, it’s a better investment than renting. (But you’ll need to rely on yourself to get the repairs done if you’re the owner, of course.)

On top of that, if you own a home, you can be eligible for different unique sources of cash flow.

Most notably, the access to home equity loans and cash-out refinancing.

Both options are exceptional to have in your financial toolbox, but it’s important to understand the different types of utility that they offer, so that you can ultimately understand which is the right option for you.


What is a Home Equity Loan? 

There are two types of home equity loans: traditional home equity loans and home equity lines of credit, or HELOC.

The differences are pretty straight forward:

Traditional Home Equity Loans

Traditional home equity loans use your home as equity to access more funds.

Often referred to as a second mortgage, this is another mortgage that’s accessible only when the market value of your home exceeds the remaining payments on your first mortgage. It usually takes somewhere between 5 and ten years to reach this point.

Traditional home equity loans are given at a fixed interest rate with a fixed agreed upon amount – available and distributed as a lump sum.

This option can be a smart choice (if it is accessible to you) if you have high interest debts that you want to pay off.

Interest rates on a second mortgage are both fixed and usually quite a bit lower than interest payments on something like a credit card.

Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) is a creditor determined line of credit available to you by using your home as equity.

HELOC can be riskier than a conventional lump-sum loan because it has fluctuating interest rates like a credit card.

Increased financial uncertainty comes with a lot more flexibility, which is the primary appeal of choosing HELOC over conventional.

A HELOC allows you to draw whatever amount you choose within your approved line of credit. Along with fluctuating interest, HELOCs typically have a higher baseline interest rate.

When you’re considering a HELOC, make sure your finances are as flexible as the interest rate could be.


What is Refinancing?

Refinancing – often referred to as cash-out refinancing allows you to take out a second loan and thus “refinance” your mortgage.

It is a larger loan that can help you pay off your mortgage, with the purpose usually being to pay off the remainder of your existing mortgage and pocket the leftover money for other expenses.

It is also a good option for avoiding PMI and the additional costs associated with it.

Knowing Which is Right for You 

Figuring out if home equity loan or refinancing makes the most sense for you requires a lot of thought, a good understanding of your own finances, and a little bit of help.

If you’re looking to piggyback off of the built-up equity you have in the form of one large loan then a traditional home equity loan might be the way to go. This can be used to pay off old debts or cover a large expense without taking out a higher interest loan like a student loan

If you want to stretch out the life of your mortgage for the purposes of lower monthly payments or want to get around private mortgage insurance (PMI), refinancing might be for you.


Contact Our Loan Specialists

Whether you’re choosing a home equity loan, or are looking to refinance, you’re looking to free up a bit of financial flexibility – and at HRCCU we can help with that.

With up to 95% of the appraised value of your home available through our home equity loan program, and cash-out refinance options ranging from five years to 30, we have options that are flexible and catered to your unique situation.

Contact our loan specialists today, and we’ll advise you on the best steps for your financial health moving forward.