Deciding between mortgage refinancing and equity release can be pivotal in your financial journey. While both options involve tapping into your home’s value, they serve different purposes and have unique implications. Mortgage refinancing is replacing your existing mortgage with a new one, potentially with better terms or lower interest rates. It’s often a choice to reduce monthly payments or change the loan’s term.
On the other hand, equity release allows homeowners, particularly seniors, to access the equity built up in their homes, providing a lump sum, regular payments, or a credit facility. This blog aims to clear the fog surrounding these two options, helping you make an informed decision that suits your financial needs and future plans.
What is Mortgage Refinancing?
Mortgage refinancing involves replacing your current mortgage with a new loan. This new loan typically has different terms – often with a lower interest rate or a different loan term. Cash-out refinancing is ideal for reducing your monthly payment, altering the loan term, or securing a more favourable interest rate.
How Does Refinancing Work?
When you refinance, the new loan pays off your original mortgage. For example, if mortgage rates have dropped since you first took out your mortgage, refinancing can allow you to benefit from these lower rates. Additionally, you can opt for cash-out refinancing, where you take out a larger loan than what you currently owe and receive the difference in cash. This method helps consolidate debt or fund significant expenses.
What is Equity Release?
Equity release, often in the form of a home equity loan, allows homeowners to borrow against the equity they’ve built up in their home. Unlike refinancing, this doesn’t replace your primary mortgage but adds a second loan. This option is typically chosen to access cash for significant expenses like home improvements, education, or debt consolidation.
How Does Equity Release Work?
In equity release, you borrow against the home’s equity, the difference between its market value and any outstanding mortgage balance. As an illustration, if the value of your home is $300,000 and your mortgage debt is $200,000, you possess $100,000 in equity. You can borrow a portion of this equity, receiving it as a lump sum. This is over and above your existing mortgage, meaning you will have two separate personal loans to repay.
Difference Between Mortgage Refinancing and Equity Release
Replacing an existing mortgage with a new loan, often with different terms (interest rate, loan term, loan type).
Borrowing against the equity in your home without replacing the primary mortgage.
Adjust the loan term or switch between fixed and variable rates to reduce monthly payments. Often used to take advantage of lower interest rates.
To access the equity built up in the home for significant expenses, such as home improvements, education, or debt consolidation.
Impact on Existing Mortgage
Replaces the original mortgage.
It does not replace but adds to the existing mortgage as a separate loan.
The new loan pays off the existing mortgage, offering additional cash through a cash-out refinancing.
Provides a second mortgage or a line of credit based on the home’s equity, over and above the existing mortgage.
May offer lower interest rates compared to the original mortgage. Rates can be fixed or variable.
Typically, it has higher interest rates than primary mortgages. Rates are usually fixed.
Adjust the loan term, potentially extending or shortening the overall repayment period.
The loan term is separate from the original mortgage, usually with a fixed repayment period.
Depending on the new loan’s terms, this can result in lower or higher monthly payments.
This results in an additional monthly payment for the existing mortgage payment.
Must have good to excellent credit score requirements for the best rates.
Credit requirements may vary, but good credit is often advantageous.
Involves closing costs, similar to the original mortgage.
It may have lower closing costs compared to refinancing.
Interest may be tax returns, primarily if funds are used for home improvement.
Interest may also be tax-deductible when used for home improvements.
How do you choose between Refinancing and Equity Release?
When deciding whether mortgage refinancing or equity release is more beneficial for you, consider the following aspects using the specified keywords:
- Cost of Refinancing and Additional Costs: Refinancing can involve significant additional charges, including refinancing closing costs, appraisal costs, and credit report costs. These can add up, so it’s important to calculate whether the long-term savings outweigh these initial expenses.
- Cost Advantages: Equity release might offer cost advantages in some cases, especially if the additional borrowing costs are lower than the total refinancing cost. This is particularly relevant if the primary goal is accessing cash rather than altering the loan’s terms or interest rate.
- Minimum Credit Score Requirements: There are minimum credit score requirements for refinancing and equity release. A strong credit score is crucial for securing the best terms and rates. Refinancing might be more beneficial if your credit score is high due to potentially lower interest rates.
- Long-Term Financial Benefits: Consider the long-term financial benefits of each option. Refinancing might offer more significant long-term savings, especially if current mortgage rates are considerably lower than your existing rate. However, this needs to be weighed against the cost of refinancing.
- Immediate Financial Needs vs. Long-Term Savings: If your immediate need is cash, equity release might be more beneficial despite potential additional borrowing costs. But refinancing is better if you focus on long-term savings and lowering your monthly payments.
In summary, choosing between mortgage refinancing and equity release depends on your financial objectives: reducing monthly payments, accessing cash, or managing debt. eMortgage provides expert guidance to align these options with your financial situation and long-term plans. By partnering with eMortgage, you gain more than a service; you receive tailored advice and a commitment to your financial success.