Refi vs. Home Equity Loan: Which is Right for You?

Welcome to our comprehensive guide on refi vs. home equity loan. If you’re a homeowner looking to tap into your equity and get some cash, you may be wondering which option is better for you. In this article, we’ll cover everything you need to know about these two popular financial products, including their differences, benefits, and drawbacks. By the end of this guide, you’ll be able to make an informed decision and choose the best option for your needs. Let’s get started!

What is a Refi?

Refi, short for refinancing, is the process of replacing your existing mortgage with a new one. The new mortgage usually has different terms, such as a lower interest rate, a longer or shorter repayment period, or a different type of loan. Refinancing can help you save money on your monthly payments, reduce your overall interest costs, or cash out your equity.

Benefits of Refinancing

Refinancing can offer several benefits, including:

Benefit
Explanation
Lower interest rate
If interest rates have fallen since you took out your mortgage, you may be able to refinance to a lower rate and save money on your monthly payments.
Shorter repayment period
If you can afford higher monthly payments, you may be able to refinance to a shorter repayment period and pay off your mortgage sooner.
Cash out
If you have equity in your home, you may be able to refinance and get some cash out to use for other expenses, such as home improvements, debt consolidation, or college tuition.
Switch to a different type of loan
If you have an adjustable-rate mortgage (ARM), you may be able to refinance to a fixed-rate mortgage (FRM) and avoid the risk of rising interest rates.

Drawbacks of Refinancing

Refinancing also has some drawbacks, such as:

  • Closing costs: Refinancing usually involves paying closing costs, which can range from 2% to 5% of your loan amount.
  • Resetting the clock: Refinancing resets the clock on your mortgage, meaning you’ll be starting over with a new repayment period.
  • Qualifying criteria: Refinancing requires you to qualify for a new mortgage, which may be more difficult if your credit score, income, or debt-to-income ratio has changed since you first got your mortgage.

What is a Home Equity Loan?

A home equity loan, also known as a second mortgage, is a loan that allows you to borrow against the equity in your home. Equity is the difference between the current market value of your home and the outstanding balance on your mortgage. Home equity loans usually have a fixed interest rate and a fixed repayment period, and the funds can be used for any purpose.

Benefits of Home Equity Loans

Home equity loans can offer several benefits, such as:

  • Lower interest rate: Home equity loans usually have a lower interest rate than other types of loans, such as personal loans or credit cards.
  • Tax-deductible: In some cases, the interest you pay on a home equity loan may be tax-deductible, which can lower your overall tax bill.
  • Fixed repayment period: Home equity loans have a fixed repayment period, which can help you budget your payments and avoid surprises.
  • Large amounts: Home equity loans allow you to borrow larger amounts than other types of loans, up to the value of your equity.

Drawbacks of Home Equity Loans

Home equity loans also have some drawbacks, such as:

  • Risk of foreclosure: If you can’t keep up with your payments, you may be at risk of foreclosure, which can result in the loss of your home.
  • Closing costs: Home equity loans usually involve paying closing costs, which can be up to 5% of your loan amount.
  • Tied to your home equity: Home equity loans are tied to your home equity, meaning if your home value declines, you may owe more than your home is worth.

Refi vs. Home Equity Loan: What’s the Difference?

Refi and home equity loan have some key differences, such as:

Factor
Refi
Home Equity Loan
Purpose
Replace your existing mortgage with a new one
Borrow against the equity in your home
Interest rate
Usually lower than your existing mortgage rate
Usually lower than other types of loans
Repayment period
Can be longer or shorter than your existing mortgage
Usually fixed, ranging from 5 to 30 years
Closing costs
Usually involved, ranging from 2% to 5% of your loan amount
Usually involved, ranging from 2% to 5% of your loan amount
Qualifying criteria
Requires you to qualify for a new mortgage
Requires you to have equity in your home
Risk of foreclosure
If you can’t keep up with your payments, you may be at risk of foreclosure
If you can’t keep up with your payments, you may be at risk of foreclosure

FAQs

What is the minimum credit score required to refinance?

The minimum credit score required to refinance varies depending on the lender and the type of loan you’re applying for. Generally, you’ll need a credit score of at least 620 to qualify for a conventional refinance, and a score of 580 or above for an FHA refinance. However, some lenders may require a higher credit score, especially if you’re looking for a lower interest rate or cash-out refinance.

Can I refinance with bad credit?

It’s possible to refinance with bad credit, but it may be more difficult and expensive. If you have a low credit score, you may have to pay a higher interest rate or provide a larger down payment to qualify for a refinance. You may also have to look for lenders that specialize in bad credit refinancing or consider a government-backed program, such as an FHA refinance.

How much equity do I need to qualify for a home equity loan?

The amount of equity you need to qualify for a home equity loan depends on the lender and the type of loan you’re applying for. Generally, you’ll need to have at least 20% equity in your home, although some lenders may accept less. To calculate your equity, subtract the outstanding balance on your mortgage from the current market value of your home. For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, your equity is $100,000.

How much can I borrow with a home equity loan?

The amount you can borrow with a home equity loan depends on several factors, such as your equity, your income, and your credit score. Generally, you can borrow up to 80% to 90% of your equity, minus any outstanding mortgage balance. For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, you may be able to borrow up to $40,000 to $70,000, depending on your lender’s policy.

How do I qualify for a home equity loan?

To qualify for a home equity loan, you’ll need to meet certain criteria, such as:

  • Have equity in your home
  • Have a good credit score, usually 620 or above
  • Have a steady income and employment history
  • Have a low debt-to-income ratio, usually below 43%
  • Have a low loan-to-value ratio, usually below 80%

How long does it take to get a refinance or home equity loan?

The time it takes to get a refinance or home equity loan varies depending on several factors, such as:

  • The lender’s processing time
  • The complexity of your application
  • The type of loan you’re applying for
  • The amount of documentation required

Generally, it may take anywhere from a few days to several weeks to get approved for a loan, depending on the above factors.

How do I compare refinance and home equity loan offers?

To compare refinance and home equity loan offers, you should consider several factors, such as:

  • Interest rate: Compare the interest rates offered by different lenders to find the lowest one.
  • Closing costs: Compare the closing costs involved in each loan to find the one with the lowest fees.
  • Repayment period: Compare the repayment periods offered by different loans to find the one that fits your budget and goals.
  • Loan amount: Compare the loan amounts offered by different lenders to find the one that meets your financing needs.

How do I apply for a refinance or home equity loan?

To apply for a refinance or home equity loan, you should follow these steps:

  • Shop around for lenders and compare your options.
  • Choose the best lender and loan for your needs.
  • Gather all the necessary documents, such as tax returns, pay stubs, and bank statements.
  • Fill out the application and submit it to the lender.
  • Wait for the lender to review your application and approve your loan.
  • Sign the loan agreement and close the loan.

Can I use a refinance or home equity loan to pay off credit card debt?

Yes, you can use a refinance or home equity loan to pay off credit card debt, but it’s not always the best option. Refinancing or taking out a home equity loan to pay off debt can help you consolidate multiple debts into one and reduce your overall interest payments. However, it can also put your home at risk if you can’t keep up with your payments. You should also consider other options, such as a personal loan or a balance transfer credit card, before using your home equity.

What other fees should I be aware of when getting a refinance or home equity loan?

When getting a refinance or home equity loan, you should be aware of other fees, such as:

  • Appraisal fee: The lender may require a home appraisal to determine the value of your home.
  • Title search and insurance: The lender may require a title search and insurance to protect against any title issues.
  • Prepayment penalty: Some loans may have a prepayment penalty if you pay off the loan early.

Can I refinance or get a home equity loan if I have a second mortgage?

Yes, you can refinance or get a home equity loan if you have a second mortgage, but it may be more complicated. You’ll need to coordinate with both lenders and make sure you meet the qualifying criteria for each loan. You may also have to pay off your second mortgage before getting a home equity loan.

How can I use the cash from a refinance or home equity loan?

You can use the cash from a refinance or home equity loan for any purpose, such as:

  • Home improvements
  • Debt consolidation
  • Medical expenses
  • College tuition
  • Vacation or travel

Is it better to refinance or get a home equity loan?

Whether it’s better to refinance or get a home equity loan depends on your individual needs and circumstances. Refinancing is usually a better option if you’re looking to replace your existing mortgage with a lower interest rate or a different type of loan. Home equity loans are usually a better option if you have a lot of equity in your home and want to borrow a larger amount for a specific purpose.

Conclusion

Thank you for reading our guide on refi vs. home equity loan. We hope this article has helped you understand the differences, benefits, and drawbacks of these two financial products. If you’re still not sure which option is right for you, we recommend talking to a financial advisor or lender to get personalized advice. Remember, both options have their pros and cons, so it’s important to weigh them carefully and choose the one that fits your goals and budget.

If you have any questions or comments, please feel free to reach out to us. We’re always happy to help!

Disclaimer

This article is for informational purposes only and should not be considered financial advice. The information provided in this article is based on our research and analysis, and may not be applicable or accurate to your specific circumstances. Before making any financial decisions, you should consult a qualified professional who can provide personalized advice based on your individual needs and circumstances. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the article or the information, products, services, or related graphics contained in the article for any purpose. Any reliance you place on such information is therefore strictly at your own risk.