If you are like many people in Canada, and around the globe, you may not understand whether mortgage refinancing and home equity loans are the same thing. These are actually two different types of loan product, and each has certain factors and components that are different as well.
Mortgage refinancing is not the same as taking out a home equity loan, because refinancing offers a number of benefits that a loan against the equity in your home does not. Home equity loans involve a second loan, while refinancing simply transfers the mortgage and refinances it so that it is more beneficial for your situation.
Mortgage Refinancing Does Not Include Multiple Loans
When you refinance your home mortgage, there is no need to take out a second loan. Refinancing involves paying off your first mortgage with the refinance proceeds. You will still only have one mortgage payment, but this may be less each month depending on the specific lender and terms involved.
Mortgage refinancing usually makes it easier to make your monthly payments, and may change some of the terms and conditions of the original mortgage that you do not like. If interest rates have fallen or your credit score has increased since the original mortgage was approved, refinancing can help you save money without adding any additional payments or financial burdens each month. This is not true with home equity loans.
Home Equity Loans Are Normally In Addition To Your Mortgage
Home equity loans are not usually anything like mortgage refinancing. As you pay off your mortgage with monthly payments, you begin to build up equity in your home. You can also have equity when the value of your home increases. Your equity is considered the current value of your home minus any outstanding mortgage loans or other debts against the property.
If you have lived in your home for a significant time, you may have a substantial amount of equity built up in the home. A home equity loan allows you to cash in on this equity, but it also usually involves a second loan against your home, as well as a second loan payment each month. In some cases this second expense each month can be a financial hardship if circumstances change.
Mortgage Refinancing Is Often A Better Option Than Home Equity Loans
When choosing between mortgage refinancing or a home equity loan, mortgage financing offers numerous benefits that the equity loan does not. Refinancing will allow you to reset your mortgage, so that you start fresh with a single payment each month, and terms which are generally more favorable to you.
Using a home equity loan instead of refinancing your mortgage can be a common mistake, one that can cost you. If you can not make both payments, your mortgage and the equity loan payment, then you could fall behind and end up on default on one or the other. This could place your ownership of the home at risk. Refinancing your home mortgage may be a better choice, especially if you want a single payment that is affordable.
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