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As a homeowner, you’ve likely built up some equity in your property, and that equity can serve as a valuable resource for financing large expenses such as home renovations, education, or even debt consolidation.
Two of the most common ways to access that equity are through mortgage refinancing and home equity loans. While both options allow you to tap into your home’s value, they are quite different in terms of how they work, the benefits they offer, and when one might be a better fit than the other.
What is Mortgage Refinancing?
Mortgage Refinancing
is the process of replacing your existing home loan with a new one, typically with better terms. Whether you’re looking for a lower interest rate, a shorter loan term, or to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, refinancing allows you to adjust the terms of your current loan. If you have built up significant equity in your home, you can also choose to do a cash-out refinance, where you borrow more than you owe and take the difference in cash.
Pros:
- Lower Interest Rate: Lock in a lower rate and reduce monthly payments.
- Consolidate Debt: Pay off high-interest debts with a cash-out refinance.
- Long-Term Savings: Shorten your loan term and save on interest.
Cons:
- Closing Costs: Fees such as application and appraisal costs.
- Longer Terms: Refinancing to a longer term could increase interest costs over time.
What is a Home Equity Loan?
A Home Equity Loan is a second mortgage that allows you to borrow against the equity you’ve built in your home. With this loan, you receive a lump sum of cash that you repay in fixed monthly installments over a set period, usually with a fixed interest rate. Home equity loans are ideal for homeowners who need a large sum of money for specific purposes, such as home improvement, education, or medical expenses.
Pros:
- Lump Sum Payment: Ideal for specific large expenses.
- Fixed Interest Rate: Predictable payments over the loan term.
- Tax Benefits: Interest may be tax-deductible in some cases.
Cons:
- Risk of Foreclosure: Secured by your home, failure to repay could result in foreclosure.
- Higher Debt Load: Adds additional debt on top of your mortgage.
- Closing Costs: Fees similar to refinancing.
Another option to consider is a Home Equity Line of Credit (HELOC).
Unlike a home equity loan, a HELOC works similar to a credit card, allowing you to borrow up to a certain limit based on your home’s equity. You can withdraw funds as needed during the draw period (usually 5-10 years), and you only pay interest on the amount you borrow. Once the draw period ends, the loan enters a repayment phase.
Pros:
- Flexible Borrowing: Only borrow what you need when you need it.
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Lower Initial Payments: Typically, lower initial payments as you only pay interest during the draw period.
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Possible Tax Deductions: Interest may be tax-deductible in some situations.
Cons:
- Variable Interest Rate: Your payments can fluctuate with interest rate changes.
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Risk of Overspending: Since it’s a revolving line of credit, it can be tempting to borrow more than needed.
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Risk of Foreclosure: Like a home equity loan, a HELOC is secured by your home, so failure to repay could result in foreclosure
BOS HELOC Options
At BOS, we offer two HELOC options to suit your needs:
Fixed-Rate HELOC:
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3-year term
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Interest-only monthly payments
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Predictable payments for easier budgeting
Variable-Rate HELOC:
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5-year term
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Interest-only monthly payments
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Rate fluctuates with the market
During the full term of either loan, you have access to your full revolving credit line. Once your need for revolving credit ends, we typically convert (or “term out”) the balance into a fixed Home Equity Loan with structured repayment.
These Options Aren’t as Scary as They Sound!
It’s natural to feel a bit apprehensive when considering major financial decisions like refinancing or taking out a home equity loan. After all, your home is one of your most valuable assets.
However, these options are common tools that many homeowners use to achieve their financial goals, and when used responsibly, they can be incredibly beneficial.
Contact a BOS Loan Professional Today!
Both mortgage refinancing and home equity loans offer valuable ways to access your home’s equity, each with its own advantages and drawbacks. It’s essential to consider your financial situation and goals before deciding.
If you're unsure which option is best for you, contact a BOS loan professional to learn more and get expert guidance on choosing the right path to unlock your home’s financial potential.