Two paths, one home: understanding equity loans vs. refinancing
How to choose what works for you
Owning a home comes with big financial decisions. When major repairs or other life expenses arise, the loan options to meet these needs can often feel overwhelming. From tapping into your home's equity to refinancing your mortgage, each option works a little differently and comes with its own benefits and tradeoffs. This guide breaks down two common home loan options in plain language so you can better understand how they work and start thinking about what might make the most sense for your goals and your situation.
Home equity loans and refinancing at a glance
| Home equity loan | Mortgage refinance loan | |
|---|---|---|
| What it is | A second loan used on your home's equity | A new mortgage that replaces your current one |
| How you receive money | One lump sum, paid to you | New loan established |
| Uses home as collateral | Yes | Yes |
| Interest rate | Lower than personal loans | Often lower than other loan types |
| Monthly payment | Fixed | Fixed for most loans |
| Loan length | Five to 20 years | Often 15 to 30 years |
| Up-front costs | May include closing costs | Often includes significant closing costs |
| Best for | One-time projects, debt consolidation, or other financial needs | Large projects or lowering your overall mortgage rate |
| Main risk | Your home is at risk if you can't repay | Closing costs and resetting your loan clock |
Home equity loans
A home equity loan lets you borrow money using the value you’ve built up in your home. This value is called equity. It’s the difference between what your home is worth today and how much you still owe on your mortgage. With a home equity loan, you get all your money at once as a lump sum. It can be a useful way to turn the value in your home into a tool to help you meet your financial needs, especially for debt consolidation to improve financial slack or larger home improvements, like a kitchen remodel or foundation repair. You then pay the loan back over time with fixed monthly payments, usually over several years, instead of dipping into your emergency fund or long-term savings.
Key features include:
- Your home is used as collateral, which means the loan is tied to your house
- Most lenders allow you to borrow up to 80% of your home’s value, depending on your credit and finances
- Appraisal may or may not be needed, with minimal closing costs
- Quick approval process compared to other home loans, sometimes in as little as seven days
- Payments stay the same each month since interest rates are usually fixed
- If the loan is not repaid, the lender could take and sell the home to recover the money owed
Since Credit Human’s home equity loans are cash out loans, the need for an appraisal depends on the amount you want to borrow. If it’s less than $100,000 then an appraisal isn’t needed, meaning you can receive funding quicker. The loan amount can range from $15,000 up to $350,000 and can be used to cover large debts like student loans in addition to home repairs. Since your home is used to secure the loan, it’s important to look at all your options and be confident you can repay the loan over time.
Home refinance loans
A home refinance loan replaces your current home loan with a new one. Also referred to as mortgage refinancing, the new loan pays off the old loan, and then you make payments on the new mortgage instead. Credit Human offers refinance loans ranging from $50,000 to $830,000 and are secured, meaning your home is used as collateral.
When you refinance:
- You apply for a new mortgage
- The lender looks at your credit, income and home value
- If approved, the new loan replaces your existing mortgage
- An appraisal is typically needed, which can make the process take longer
- Closing costs and a down payment are needed to secure the loan
Most people refinance to lower their interest rate, but that’s not the only reason. You may also refinance to change how long you’ll be paying off the loan (i.e. changing from a 30-year to a 15-year term), or to switch from an adjustable interest rate to a fixed one. You could also use this method to access some of the home’s equity as cash after the down payment required for the loan. Like when you first bought your home, refinancing comes with closing costs, which can add up. When considering a refinance or home equity loan, it’s beneficial to think about how long you plan to stay in the home and whether the savings will be worth the cost over time.
Need help deciding which loan option is best for you?
There’s no “right” home loan, only the option that best fits your plans, finances and comfort level. Before making a decision, it can help to talk with someone who understands the full picture and can walk you through your choices without pressure. Call us at 844-468-9369 to meet with a home loan advisor, ask questions and get personalized guidance based on your unique situation.
