Let us first start by defining what a Home equity loan is and what refinance means and then look at the pros and the cons.
Home Equity
Home equity loans are used when you want to borrow a set number against the growth in value of you home over the number you owe. A home equity loan is most ordinarily held in a second position lien (second trust deed), this is because the home owner usually has an existing loan. If however, the original mortgage had been repaid then the home equity loan number would be secured against the property as a first position lien. A home equity loan then can be either a first mortgage or a second mortgage!
Refinance
The view of refinancing your mortgage is fairly straightforward - You replace your original mortgage for an number higher than the outstanding balance. So it differs substantially from a home equity loan as it is akin to taking out a fully new mortgage!
Equity Pros
1. It is coarse to be able to borrow up to 100% or more of the value of the home, less any outstanding debts or mortgages. There are also lenders that will lend up to 125% in extra circumstances and these are referred to as 'over-equity' loans.
2. In the United States, under obvious circumstances, it is often possible to deduct home equity loan interest on one's personal income taxes. A visit to your accountant or financial adviser may be suitable to see if you qualify for tax relief.
3. Fees such as estimation fees, creator fees, title fees, stamp duties, arrangement fees and closing fees are often included in the loans.
Equity Cons
1. A home equity loan creates a lien against the borrower's house, and reduces actual home equity. This means that the loan to equity ratio, if added borrowing is needed, can only enhance through rising property prices.
2. Since it is a debt against your own property a home equity loan is a secured debt. Some borrowers prefer unsecured debt at a higher rate.
3. Most home equity loans wish good to exquisite prestige history, and a cheap loan-to-value ratio. The guess for this is simple. If the home owner gets into financial difficulties and since most equity loans have a second lien then in default situation the original lien owner gets paid first - the secondary lien owner gets the 'balance' that's left!
Refinance Pros
1. If you refinance your mortgage, you may be able to sacrifice your current rate.
2. It's most useful when rates are lower.
3. It can be tantalizing to home owners seeing to merge other high interest debts as the prestige score of the borrower is often relied on to a lesser extent than a home equity loan.
Refinancing Cons
1. By doing a 30-year refinance now you sacrifice your payments but now your house won't be paid off for another 30 years.
2. An often large lump sum is payable at the end of the loan and is referred to as a balloon payment - If you can't make the balloon payment or refinance, you face foreclosure and the loss of your home.
3. There can be secret penalties if the borrower pays off the number early - these are known as pre-payment penalties and the borrower should all the time find out if these penalties apply - or walk away!
4. If the borrower pays the minimum only - the loan will not get repaid. In fact the number of the loan can growth over the period resulting in a larger balloon payment at the end
Conclusions
Home equity loans can be a great financial management resource tool when used responsibly. A major advantage over refinance is the possibility of getting income tax relief on payments. A Home equity loan vs refinance as an selection means that you can end up with one easy to handle lump-sum payment while having the safety of a fixed rate. Refinance can be more high-priced over the longer term with the balloon payment, in many cases being indeterminate at the start of the loan!
Home Equity Loan vs Refinance - The Pros and Cons