Home Equity Loan Refinance Vs Mortgage Refinance

Understanding the difference in a home equity loan refinancing Vs mortgage refinance is very important. Many consumers will consider a refinance of some sort each year. Thousands of homeowners will file for this type of new loan structure. But, for many individuals this is not something that they really understand. Unfortunately, not having the necessary knowledge can cost the homeowner dearly. Understanding the home equity loan refinance Vs mortgage refinance options is essential to good money management.

Home Equity Vs Mortgage

The difference between home equity and a mortgage should be understood. A mortgage is the initial purchase of a home through financing. It is usually for most of the home's value although can be lower if there is a substantial down payment put on the home. On the other hand is home equity. Equity is the amount of money that is available in a mortgage that is paid off. For example, if a consumer purchased a home for $100,000 and has $40,000 left to pay on the home, there is potentially $60,000 worth of equity in the home. But, this number fluctuates with the home's worth as well.

Refinancing

Understanding the difference between refinancing and getting a home equity loan is essential. When a home is refinanced, the terms of the loan and the interest rate of the loan change. The mortgage or other home loan is reworked and reestablished based on the new terms. If a lender provides a refinance for a 30 year loan, it may be re-extended to another 30 years. In an equity loan, only the amount that has been paid down is financed and the original mortgage still needs to be paid.

To determine if one of these methods is better than the other for a consumer, they should figure out the total cost of the loan both ways. By understanding that a refinance extends the mortgage longer through different terms and that a home equity loan is a loan that is taken on the equity or paid down portion of the value of the home, consumers can actually make the right decisions.