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

Refinancing and home equity is a different kind of loan.

As a homeowner, you need to know and weigh the two types of loans’ advantages and disadvantages. In this post, we are going to provide you the difference between refinancing and a home equity loan.

So, if you want to know more about it, then keep on reading and enjoy!

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An Overview of the Difference Between Refinancing and Home Equity Loan

Homeowners know that their property is not just a type of investment nor an area to spend the rest of their life. Home can be more than just these. You can use it whenever you need cash for upgrades, repairs, or emergencies. You can get instant cash from your home through a home equity loan or mortgage refinancing.

The money you can get from refinancing can be used to pay your previous mortgages in exchange for a new one. Don’t worry since refinancing has a lower rate of interest, which makes it ideal for many homeowners out there. On the other hand, when we say home equity loan, it refers to the money you can get upfront as an exchange for your property’s equity. This will serve as your separate loan.

Things to Keep in Mind about Refinancing and Home Equity Loan

  • These two types of loans offer every homeowner a unique way to attain instant money. The cash you qualify for is based on your home’s equity.
  • You might opt for refinancing if you have still planned to live in your home for one year. Ideally, refinancing reduces your current interest rate. As a result, you can have a lighter pocket for your home’s monthly payment.
  • On the other hand, the home equity loan is recommended for those homeowners who want to acquire enough money for home renovation or improvement and other specific reasons.


Explain Refinancing

Mortgage refinancing uses two known methods, which are the cash-out loan and rate and term refinance. Mortgage refinancing is also called refi. When we say rate and term refinance, the physical money exchange is not included. The only thing that requires money changing hands is the fees related to funds and closing that will serve as a new loan that you will use to pay your previous loans. On the other hand, unlike the rate and term refinance, the cash-out loan includes money changing hands. You will be handed cash from your new loan.

On average, 3 per cent of your total loan is considered as your closing costs. This is true in rate and term refi and cash-out loan. Aside from that, the tax you need to pay is dependent on your location. If you will consider refinancing, it is important that you are looking forward to spending more years in your home. We recommend rate and term refinance to those homeowners who can earn their overall closing rates in less than two years to attain a reduced interest rate you need to pay monthly.

On the other hand, if you are planning to purchase another property to stay in, you may consider home equity loans. One of the good things about this type of loan is that it offers lower closing costs compared to mortgage refinancing.

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Explain Home Equity Loans

Compared to personal unsecured loans, home equity loans offer a much lower interest rate. This is possible because a home equity loan is collateral to your home. But if you have a defaulted mortgage, your lender may take away your property.

Just like mortgage refinancing, home equity loans feature two methods, including the HELOC or Home Equity Line of Credit and the Traditional Home Equity Loan, enabling you to get a lump sum of money.

When we say the Home Equity Line of Credit (HELOC), it is a type of loan that is related to your home’s equity. After receiving the money, you can borrow any amount of money based on your needs. But make sure that the money you will borrow fits in your credit line. But take note that some loans have a minimum amount of initial withdrawal.

If you are not going to use your credit line during the draw period, you are required to pay an inactivity fee. On the other hand, in each withdrawal you will make in the future, you will shoulder the transaction fee.

Your credit line will end after the expiration of your draw period. After a few days, the repayment period will start, which is when you need to pay the interest rate and the principal money you borrowed.

Special Considerations

Your credit score has something to do with the amount of money you can get from either a home equity loan or mortgage refinancing. You might not be qualified to borrow money from refinancing if you have a lower credit score than what you have during your first home purchase.

This is because low credit scores can lead to a higher interest rate. If you have a low credit score, then you may consider talking with a lender that could help you to improve it.

TIP: Also read: 7 Factors That Influence the Value of Your Property


Every homeowner might benefit from borrowing from mortgage refinancing or home equity loans. If you are looking for an effective way to get the best out of your home, it would be great if you will borrow money from one of these two types of loans. If you still have a hard time deciding which type of loan is best for you, consider your reason for borrowing, where you will use the borrowed money, and how much your available equity is.

Before you apply for either of these loans, make sure that you have a competitive credit score.  A potential lender can help you increase your credit score, enabling you to qualify for either of these loans. Assess yourself, your credit score, as well as your home equity to determine if you are qualified for a home equity loan or mortgage refinancing.