Understanding Home Equity Loans vs Refinancing a Mortgage

Understanding Home Equity Loans vs. Refinancing: Which is Right for You?

When it comes to leveraging the value of your home, homeowners often find themselves debating between a home equity loan and refinancing their current mortgage. Both options allow you to access funds but serve different purposes and come with distinct benefits. Let’s dive into the key differences, average equity figures, potential uses, and advantages of each to help you make an informed decision.

What is a Home Equity Loan?

A home equity loan allows homeowners to borrow against the equity they have built in their property. Equity is calculated as the difference between your home’s market value and the remaining balance on your mortgage. For example, if your home is worth $500,000 and your mortgage balance is $300,000, your equity is $200,000. Most lenders allow you to borrow up to 80% to 85% of your equity.

Average Equity Statistics

According to a 2023 CoreLogic report, the average U.S. homeowner had $274,000 in tappable home equity, a significant resource they can use for various financial needs. Tappable equity is the amount they can access while retaining 20% of their home equity.

How Can Funds from a Home Equity Loan Be Used?

Home equity loans are often used for specific purposes, including:

Home Improvements: Renovating kitchens, adding extra rooms, or updating bathrooms.
Debt Consolidation: Paying off high-interest credit card debt or personal loans.
Education Costs: Covering college tuition or other educational expenses.
Emergency Expenses: Funding unexpected medical bills or urgent financial needs.

What is Mortgage Refinancing?

Refinancing involves replacing your current mortgage with a new loan, often with a lower interest rate, different loan term, or cash-out option. Homeowners who refinance usually aim to reduce their monthly payments or access funds for financial goals.

Benefits of Refinancing

Lower Interest Rates: Refinancing when rates drop can lead to significant monthly savings. For example, reducing your interest rate from 6% to 4% on a $400,000 loan could save you over $400 monthly.
Shortening Loan Term: Switching from a 30-year to a 15-year mortgage allows you to pay off your loan faster and save on interest.
Cash-Out Option: Similar to a home equity loan, you can refinance for an amount greater than your existing loan balance to access cash for various needs.
Lower Monthly Payments: Extending the loan term or reducing the interest rate can free up monthly cash flow, providing financial flexibility.

Examples of Refinancing Savings

Suppose your current mortgage payment is $2,500 monthly; refinancing reduces it to $2,000. Over 12 months, that’s an extra $6,000 in savings—money you could use for investments, savings, or paying off other debts.

Which Option Is Right for You?

Choose a home equity loan if you need a lump sum for a specific purpose and prefer a second loan in addition to your existing mortgage.
You can refinance to lower your interest rate, change your loan term, or consolidate debt with a new single mortgage.

You can contact me, Sloane Young, REALTOR® with Coldwell Banker, at sloane.young@cbrealty or by phone at 510-672-2040.

Reach out today to take the first step toward maximizing your financial potential!