Home equity loans are perfect for homeowners who need money for home repairs, paying off credit cards, or paying for a child's education. Home equity loans allow homeowners to borrow money using their home's equity as security or collateral. These loans are different from refinancing a home. Refinances create a new mortgage, and homeowners are subjected to high closing costs and other fees.

Benefits of Home Equity Loans

Home equity loans are an attractive alternative because the process is much quicker than refinancing. On average, homeowners receive funds within a week. Furthermore, fees are minimal. Those who refinance their home to receive cash-out at closing can expect to pay thousands of dollars in closing costs. On the other hand, refinancing is a great option for individuals who purchased their homes when interest rates were high.

How Does a Home Equity Loan Work?

When a person acquires a home equity loan, the money borrowed is based on their home's equity. Equity is the difference between a home's worth and the amount owed to the lender. For example, $35,000 owed on a property valued at $60,000 has an equity of $25,000. Thus, the owner of this property may obtain a loan for up to $25,000. The money borrowed can be used to start a business or pay the balance on credit cards and student loans. Of course, home equity loans must be repaid. Therefore, borrowers should be able to handle an additional monthly payment. Defaulting on a first or second mortgage has serious consequences.

Refinancing Home Equity Loans

Unfortunately, home equity loans carry a higher interest rate. In some cases, homeowners may also receive an adjustable rate. Adjustable rates are risky because the interest rate may rise throughout the duration of the loan. Individuals in this situation may consider refinancing their home equity loan. Refinancing a home equity loan creates a new mortgage which combines the original loan amount and the second mortgage. Thus, instead of making two monthly payments for a $35,000 first mortgage and a $25,000 second mortgage, homeowners will make a single monthly payment for a new mortgage of $60,000.