What’s the difference between a mortgage refinance and a HELOC?

Homeowners have several things to consider when it comes to finding needed funds for financing a project or consolidating debt.   Two popular lending options are refinancing an existing mortgage or tapping into the equity in your home with a home equity line of credit.  Let's explore the difference between the two! 

Mortgage refinance

A refinance could help you to reduce your monthly payment, pay off your home loan faster, or consolidate debt. Many consider refinancing a mortgage if they have the ability to pay a lower interest rate on a home loan then they are currently paying.  For example, if you are paying, say, 7% interest or more on a home loan when you could qualify for a rate as low as 6%. Things like credit score and closing costs should be taken into account when considering this option.  Once you determine how much you would spend on closing costs,  you can use our refinancing calculator to estimate your new monthly payment and see if this option would be a good fit for you. 

Home Equity Line of Credit (HELOC)

A HELOC is a type of home equity loan with a variable-rate, often tied to the prime rate. This means when interest rates rise, so will your monthly payment. With many HELOCs, money can be withdrawn as needed, instead of getting it in one lump sum and you only pay interest on the money you borrow.  A HELOC is a good option for remodeling projects, debt consolidation, and large expenses. Keep in mind that a HELOC may be difficult to qualify for without substantial equity in your home.  

Oftentimes, homeowners consolidate several high-interest loans into something more manageable by using a home equity loan or HELOC. Then they can take the new, less expensive loan and use it to pay off credit cards, vehicle loans, student debt, and other loans that have higher interest rates. This can be a solid way to reduce your monthly spending.

Additional Things to Consider

Before you consolidate, especially if you decide to transfer your credit card debt into any form of home equity loan, it’s important to understand the difference between an unsecured debt like a credit card and a secured debt like a HELOC or refinance.   If you default on a credit card payment, your account can be sent to collections, increasing your interest rate and reducing your credit score.  The consequences of defaulting on a secured debt can involve foreclosure on your collateral, which in the case of a home equity line of credit is your home. It's important to be mindful of spending and how you are using your line of credit. 


With reporting by Casandra Andrews for SavvyMoney

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