The Pros and Cons of Refinancing Your Mortgage vs. Opening a Home Equity Line of Credit

When it comes to a mortgage and the financial stability of your home, there's no such thing as too much you can know in the case of keeping your biggest investment safe. If you're looking at paying off debt and are re-considering the equity in your home, here are a few things you'll need to know about refinancing your mortgage and home equity lines of credit.

Refinancing Vs. HELOC

Refinancing your mortgage, what's also known as a home equity loan, can be best summed up as a second mortgage. While you're expected to pay the amount loaned back in monthly payments for a pre-determined number of years, you'll receive this money at a fixed rate of interest. On the other hand, a home equity line of credit (HELOC) is similar to a credit card where the amount you can borrow is determined by your credit history and income, and funds are withdrawn using this line of credit.

All About The Interest Rates

When you refinance your mortgage, the interest rate will be fixed so you won't have to worry about any volatile increases down the road. Since this qualifies as a second mortgage, the interest rate on it will be higher than your initial mortgage but lower than a HELOC. When it comes to HELOCs, the amount of interest you'll be paying will be linked to the prime rate and will fluctuate with the market, and this means you may end up paying a higher amount of interest than you bargained on. 

How The Interest Is Calculated

While refinancing your mortgage can seem like a great opportunity since you'll be able to deal with a fixed interest rate, it's worth noting that the way you'll be charged is different. A mortgage refinancing will charge you interest on the total amount of your loan while a HELOC will only require you to pay interest on the money you've withdrawn from it, so you'll want to consider which option works best for you.