Refinancing vs. Home Equity Loan: Which Is Better for Renovations?

Home improvements can be an amazing way to make your space the way you want it. When you do these improvement projects, you not only create a unique, custom dream home for yourself, but also create a large amount of equity in your home. 

As an example, it allows you to have your money work for you. Homeowners most typically use two powerful methods of funding these renovations – a home equity loan or mortgage refinancing. 

Both of these options utilize the equity from your home to allow you to draw on the available equity to fund your renovation projects, while still providing a sound financial structure. 

Depending on your renovation, current mortgage terms, prevailing market interest rates, and long-term financial plans, it will help determine which strategy is best for you. The understanding of the mechanics of both options will help you successfully fund your renovations with minimal financial pressure. 

KEY TAKEAWAYS

• A refinancing replaces your existing loan with a new, potentially more beneficial loan on a single piece of real estate.   
• Home Equity Loans create an additional loan on an existing property and are made on a separate payment schedule from your original mortgage.   
• Cash-out refinances serve as a solution for large-scale renovations.   
• Home Equity Loans are used to support small, well-defined projects.

What’s Involved in Refinancing a Home Loan?

Now let’s talk about these definitions. So, precisely what is refinancing a home loan? In essence, it represents replacing your current mortgage with a refreshed one under different terms. Homeowners often do this to secure a adjust the loan term, lower interest rate, or change from an adjustable-rate to a fixed-rate mortgage.

When it comes to renovations, the most common method is cash-out refinancing.Cash-out refinancing lets you refinance your mortgage for more than what you presently owe and take the difference in cash, using that money to fund whatever renovations you are undertaking. 

For example, if your apartment is worth $450,000, and you owe $250,000, refinancing could allow you to borrow against a portion of that equity. Then those loans are rolled into your new mortgage.

Mortgage refinancing can offer a number of advantages. As previously mentioned, one of the major positive aspects of this sort of refinancing is potentially resulting in lower interest rates. You might also be able to modify the repayment term, spreading renovation costs over years and thus minimizing your monthly payment.

What a Home Equity Loan Offers

A home equity loan is separate from refinancing. A home equity loan is a separate loan taken out in addition to your existing mortgage rather than a replacement mortgage. The loan is secured against your home and is based on the equity you have accumulated.

A home equity loan usually offers a lump sum of cash upfront and comes with a fixed interest rate. These loans also have their own repayment schedule aside from your mortgage payment. This is perfect for homeowners who want steady, predictable payments and already have favorable mortgage terms that they do not want to mess with.

This can feel more straightforward, especially if the renovation project itself is well-defined because the mortgage remains unchanged– like a kitchen remodel or bathroom upgrade.

Refinancing a Home Loan vs. Home Equity Loan: What’s the Difference?

Mortgage refinancing or a home equity loan– which is better? As you might expect, the answer is “it depends.” Although both rely on your home equity, they are otherwise very different.

• Structure. A home equity loan leaves your mortgage untouched while adding a second loan alongside it while refinancing restructures your entire mortgage.
• Interest rates. Refinancing might offer a lower overall interest rate if the market is currently in your favor, while home equity loans usually come with higher interest rates (because they are secondary loans).
• Repayment timelines. Refinanced mortgages generally stretch over 15 to 30 years, while home equity loans have shorter terms (5 to 15 years).
• Monthly payments. With refinancing, you have to pay once a month (your mortgage payment), while a home equity loan means making two payments (the mortgage and the equity loan).
• Costs and fees. Refinancing usually means higher closing costs because you are replacing the entire mortgage, whereas home equity loans typically have lower upfront fees but still involve appraisal costs and other miscellaneous fees.

Which Option Best Suits Your Renovation Goals?

Again, we come to the question? Which is the better option for you?

Refinancing may be the option for you if you are planning a large renovation project. In case the current interest rates are lower than your current rate, or you want to simplify payments into a single loan. It is also ideal if you plan to stay in the home long-term.

A home equity loan is the better decision if you already have a competitive mortgage rate that you do not want to lose, if your renovation budget is modest and clearly defined, or if you just want renovation costs aside from your main mortgage.

Things to Consider

Before you make a last decision on either option, it is wise to think carefully about various factors:

• Current interest rates (small differences can actually add up over time)
• Your credit score (better credit can mean more favorable terms for either type of loan)
• Remaining mortgage terms
• Renovation budget (refinancing is better suited to large-scale projects)
• Income stability (a steady income help longer repayment commitments)
• Long-term plans (refinancing may not be the wisest choice if you expect to move soon)

There’s no universal answer when choosing between these options — the key is understanding the advantages and disadvantages pof each and acting accordingly.

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