Refinance or Home Equity Loans: Deciding Which is Best for Your Needs
Home equity is the difference between the money you owe on your home and its appraised value. If your current mortgage is $100,000, and your home is worth $170,000, you have $70,000 in available equity. For homeowners who find themselves in need of cash for emergency repairs, necessary home upgrades, or debt consolidation, tapping into that equity can be the best way to solve a financial crisis. Both a home equity loan and a refinance are possible financial solutions, but there are pros and cons to each.
Home Equity Loans
Home equity loans have higher interest rates than a refinance. Rates vary daily and from one financial institution to another, the rates are also dependent on the length of the loan. For example, you might have an interest rate of 6% if you choose a 15-year home equity, or a rate of 4.75% for a 5-year home equity loan. The quicker you can pay back the money, the lower your interest rate will be. Refinances can lead to interest rates of a full percent less or more, again depending on your home loan company, but you may not see the savings for a number of years. If you plan to move in a few years, a home equity is a better choice.
The costs associated with taking out a home equity loan are lower than the costs involved with refinancing your mortgage. With a home equity, you generally pay for credit reports and a title search. Many lenders will use the town's appraised value that appears on your property tax bill, so there is no need for a costly appraisal. You also do not have to pay any points.
Home equity loans are usually for shorter terms than a refinance. Generally, the longest home equity fixed loan is 25 years. There are home equity lines of credit on which you can access the money for 10 years and then pay it back for the next 15 years. These can be riskier because the interest rate is adjustable.
Home equity loans take less time to process. Typically, a home loan goes through the process of gathering the required paperwork, such as credit reports, paycheck stubs, and property tax bills to determine the town's appraised value of your home. Once that step is done, the lender goes to the underwriters who decide if your loan request is too risky or if they feel you are capable of repayment. Before the home equity loan papers are signed, a title search is completed to make sure there are no current liens on your home for things like unpaid taxes. Generally, you'll have your money in a couple of weeks.
Refinances
The interest rates on refinances are less expensive, so you save money in interest charges over the life of your mortgage refinance. If your home equity interest rate is 6%, and the refinance rate is 4%, that's a full 2% difference. That difference can save a lot of money over the years. The key is that it does take years to see these savings, so refinances are best if you plan to stay in your home for a long time.
Fees for a refinance are higher. Not only do you pay for the title search and credit report, but you also pay for an appraisal and for any points attached to the interest rate. If you choose an interest rate with two points, you must pay 2% of the refinance amount. If you're refinancing for $200,000, 2% comes to $4,000.
With a refinance, the lender gathers paperwork, orders an appraisal, and then waits for the appraiser to schedule an appointment to go appraise your home and complete the report. This can take a week or two to complete. Once that is done, the loan request is sent to underwriting. When all is said and done, it can take a month or more before your refinance is approved and an appointment is made for you to sign the paperwork.
