People often use the terms mortgage refinance and home equity loan interchangeably, but they are not the same thing. Before you decide between the two, make sure you understand what your lender means.
People often use the words "refinance" and "refinancement" interchangeably because you usually refinance your existing mortgage when you have some equity in your home. Equity is just the difference between how much your home is worth on the market and how much you still owe on it. To put it in dollars, a person who owns a home worth $100,000 but still owes $60,000 on the mortgage has $40,000 in equity.
That doesn't mean that all lenders will let you borrow an extra $40,000. In fact, a lot of lenders have limits on how much they will lend. It's possible that a certain lender will only loan up to 90% of the home's market value. In that case, the home would only be worth $90,000 for the loan. Even though the amount of equity stays the same, the amount of loan that can be given depends on the rules of the lender.
If your home is worth $40,000 more than you owe on it, you might want to get at least some of that money. But what do you have to do to get it? You can get a mortgage refinance loan or a home equity loan, which are the two main choices. The name says it all: a mortgage refinance is when your original mortgage is added to a new loan, giving you a mortgage refinance loan. But a home equity loan doesn't change the loan you already have. You'll have to pay a second mortgage payment on top of the first one.
Which is better, then? It really depends on a number of things. When you took out the first loan, did you get good terms and rates? If so, you might want to think about a home equity loan so that you can keep your original mortgage's great rates and terms.
Can you pay the "double" amount that is needed? Remember, if you take out a home equity loan you'll still be making the original mortgage payments and your home equity loan will be tacked on top of that. Some people find that they can't make the payments they need to make because they don't have enough money.
There's plenty to consider before you decide whether it's time for a mortgage refinance or you should take out a home equity loan.
