Home Equity or Refinance: Which is Better For You?

Looking to refinance your first mortgage and take cash out at closing? There may be a better deal for you.

When the prime rate is below the average rate charged on 30-year fixed mortgages, consumers looking to tap their home equity may find it cheaper for them to get home equity loans or lines of credit. The rates on these loans may be lower than refinancing an existing mortgage.

Consumers should look at why they're borrowing and which loan makes the most sense for them. While home equity loans and lines of credit are attractive, there are other options for homeowners.

Home equity loans are good for consumers that need the money to make a purchase, and know they are going to pay it off in a few years. Once the dollar amount gets bigger though, the lines start to cross. If you need a longer time to pay the amount off, or if you can't afford a 5-10 year repayment schedule, a refinance may be the better option

Home Equity Behavior

Home equity loans work a little differently than a mortgage. First of all, home equity loans carry variable interest rates, so when the Fed raises interest rates, home equity rates also rise. Equity loans and lines of credit usually come without closing costs, so they can be $2,000 - $3,000 cheaper than first mortgages.

The Best Equity Candidates

Consumers who plan to pay off their loans in a reasonable amount of time and those who don't need to borrow much money make good candidates for home equity loans. Long-term equity loans tend to have rates that are higher than fixed-rate mortgages, even when the prime rate is low.

Heritage Credit Union can help you decide which loan is right for you. We can answer any questions you may have about the differences between home equity lines of credit and mortgages. Contact your local branch today!