House Remortgage vs. Home Equity

Using equity financing for discretionary purchases is not generally recommended.
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Remortgaging your home or getting a home equity loan are very different financial dealings, though both relate to borrowing money with your home as collateral. A remortgage means getting a new home loan to replace your existing one. A home equity loan or line of credit means you borrowing money based on the equity in your home.

Remortgage Basics

The term remortgage is much more prevalent in Britain. The more common term in the United States is refinance. When you refinance your mortgage, you get a new loan -- and sometimes a new lender, that pays off and replaces your current home loan. Homeowners use refinances for a few common purposes. Some simply want a better interest rate, which saves money over time. Others want to reduce monthly payments by spreading the repayment back out to a 15- or 30-year term.

Benefits and Drawbacks

Remortgages, or refinances, are more common when interest rates trend lower. This process gives you a chance to improve your financial position through reduced payments and interest savings. Usually, though, you must pay loan closing costs similar to those on your original loan. For a refinance to make sense, you usually need to plan to stay in your home long enough to recoup your investment through monthly interest savings. Lowering your interest rate also reduces the tax deduction you get for mortgage interest.

Home Equity Basics

Home equity is the difference between your home's market value and your remaining loan balance. Home equity financing is a way for you to borrow against the amount of ownership you have in the property. You can get a home equity loan or line of credit. A loan is a fixed amount with an amortized repayment schedule like you probably have with your first mortgage. A line of credit gives you open access to borrow funds up to a limit. Each type of financing is secured by your property.

Benefits and Drawbacks

Home equity loans typically have lower rates than unsecured loans. The lender has lower risks because your home serves as collateral. This makes home equity financing most useful for major purchases like home renovations, education or a business start up. The biggest drawback of home equity financing is that you lower your equity stake and risk losing your property to foreclosure if you do not repay. If you can tolerate the risks, equity financing saves significant interest. The other issue is whether to go with a fixed loan or credit line. The loan usually works best if you need a set amount and prefer a repayment schedule with principal and interest payments. The line helps if you are uncertain of how much you need and prefer to only make payments based only on what you use during the initial draw period of five to 10 years. After that period, though, you must begin to make higher payments with both principal and interest.

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