Real Estate How-To

Refinancing and Home Loans

Refinancing and Home Loans

While buying a home is definitely the largest financial commitment the average person is likely to make, there are many more potential costs associated with home ownership. From renovation expenses and redecorating to major repairs, there are all kinds of reasons that homeowners may choose to make use of the equity value of their homes.

Two major ways two access the equity value of a home is via refinancing the mortgage, or through a home loan. It is important to understand the pros and cons of each option, to be sure to choose which kind of financing option makes the most sense for your situation.

Refinancing

Refinancing a mortgage is a process that entails paying off the existing mortgage as well as any other legal claims that exist against the property, and then setting up a completely different mortgage. If mortgage rates are lower than when you originally obtained your mortgage, or new types of mortgages that were not previously available have now been introduced, refinancing your mortgage can save you thousands of dollars in interest fees and other costs over time. As an added bonus, you will have the option of accessing the equity in you home through the refinancing process, so in addition to saving money long-term, you will have access to more liquid cash immediately, which can be used to improve your home or purchase other investments.

Home Loans

Home equity loans are a type of loan wherein the borrower uses the equity value in their home as collateral. This reduces the over-all equity of the home, and acts as a lien against the borrower’s property. Home loans come in two primary forms: home equity loans, which are one-time lump sum loans that usually have a fixed interest rate, just like a mortgage; and home equity lines of credit, which is a revolving line of credit that usually has an adjustable interest rate and can be accessed repeatedly as the borrower needs. In both cases, home loans can be extremely useful for expenses like major home repairs and education costs, things that are considered investments in the home and the overall financial health of the family.

When choosing between a home equity loan and refinancing a mortgage, it is important to pay attention to the larger economic market. If mortgage rates have decreased and refinancing will help you to pay off your mortgage quicker while lowering your payments, then this can be a wise option. However, if you are very happy with your mortgage rate and do not want to change it, then taking out a home equity loan can be a simpler and more secure way to access the value in your home.