Both a home equity loan and refinancing involve loans secured by a portion of the home’s equity. However, they are distinct loan instruments subject to different regulations and typically sought by homeowners for different reasons.
A home equity loan uses equity in a borrower’s home as loan security, as explained at Investorwords.com. Lenders tender such loans toward the equity value minus any mortgage claims against that equity, as described at FTC.gov.
Typically, homeowners seek home equity loans to liquidate, over the life of the loan, some cash value. Owners borrow against the home’s valune in this way for purposes such as remodeling.
Although you may find a home equity loan described as a second mortgage, as at Businessditionary.com, a true home equity loan is not a mortgage nor subject to the foreclosure regulations true mortgages must adhere to. Should property values, and thus the home’s equity, decline, the lender can more easily seize property than a mortgage lender can.
A refinance is the replacing of one mortgage with a different mortgage loan, as explained at Investorglossary.com. The new mortgage loan pays off the previous loan and in some cases other debts as well.
Reasons to Refinance
Refinancing might offer the homeowner a lower interest rate, a lower monthly payment, a reduced loan term, a changeover from a variable to a fixed rate or any combination of these advantages.