What’s the difference between a Home Equity Loan, Refinancing and HELOC
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A home equity loan is a lump sum loan with a typically fixed rate. They give you all the money you’re borrowing at once and you pay it back in installments.
Refinancing is choosing to change mortgages on a home. This could be advantageous if you can lower your interest rate, decrease the number of years you want on your loan, believe you have achieved 20% equity in a home and want to get rid of PMI, or if you’re in a bad spot and need to reset your amortization schedule to more years to lower your payment.
A HELOC (home equity line of credit) is like a lower interest credit card with your house as the collateral. You spend as you need to and interest is accrued as you spend, rather than on the whole available amount.
**Second Mortgage** is when you already have a mortgage but you need some cash, so you sell your equity (how much of your home you own) back to the bank and you now have another monthly payment to buy back your equity. Your home is the collateral, so the bank can foreclose your home and sell it if you don’t pay.
**Home Equity Loan** is a type of second mortgage. **HELOC** stands for Home Equity Line of Credit, and is similar to a Home Equity Loan except you don’t have to use the max amount. If approved for $25k, you can only use $10k if you want.
However, you can also do both even if your house is paid-for.
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**Refinance** is to redo the mortgage on your home (or car) to get a lower rate. This can be done with your original lender or a new one (for instance, my father recently got a car loan and the rate was too high, so the next day he went with a local credit union, they paid off the first lender and now he pays them instead).
It is financially savvy to utilize this if your current interest rate is high. They can be factors of just one lender just being better than another, or after a few months/years your credit score is better or the economy is better (for instance, mortgage & car loans have about 2x the interest rates from just 1yr ago).
Home equity loan and a HELOC are both additional loans against your home — what sometimes are referred to as second mortgages. While you continue to pay your primary mortgage, you then borrow against the equity you have and also make payments toward that loan.
A home equity loan is a fixed amount of money and then a fixed payback schedule. Like you borrow $100k to put on an addition, and then pay that back over 20 years.
A HELOC is a line of credit, where you get a limit, but can draw only a portion of that at a time. Maybe you got a $100k HELOC, but you only need $15k for a roof now, so that’s what you borrow. A few years later you pull out another $50k for a kitchen remodel. There is typically a period of like 5 or 10 years in which you can draw out more money, and then a repayment only period.
Refinancing is paying off your current mortgage entirely, and then getting a new one. If you take on a larger mortgage than your current balance, you could pull money out to use for remodeling, etc. Like if your home is worth $500k and your mortgage balance was $300k but you then take out a new $350k mortgage and then have $50k to use for a new kitchen.
Home Equity Loan is a second loan that is junior to the original mortgage. A borrower still have your original mortgage after getting a home equity loan.
Refinancing is a loan that is used to repay the original mortgage in full it replaces the old mortgage (it’s possible to change the terms or increase the balance etc).
HELOC is similar to a home equity loan but it’s not quite the same it’s an approval to borrow up to X amount against the home but may not have any borrowing. It’s more like a credit card limit, the bank might agree to loan up to $100,000 at any time over the next year if you need it. This lets a borrower pay a fee and lock in terms even if they don’t have an immediate cash need or if the don’t know the full amount they might want to borrow. Once the line is drawn it’s very similar to a Home Equity Loan.