When homeowners desire remodels or improvements, they need to consider how to pay for the work. Many people do not have the money needed for these projects so they rely on a loan. In this case, options include getting a home equity line of credit or refinancing the mortgage. Which is the best choice?
Current rates and closing costs will affect the decision. When thinking about refinancing, compare the rates of the current mortgage to the new loan. If today’s interest rates are even slightly lower, refinancing could be a good option. When the new loan would have the same or a higher interest rate, it’s time to factor in closing costs, which could add a significant amount.
A home equity line of credit would generally not come with a closing cost. However, the adjustable rates on this type of loan mean that the interest will likely increase in today’s environment. When considering this option, compare the charges from the higher interest to the closing costs of refinancing.
Tim Parker, owner of a content company focused on finance and business, explained on Investopedia that a home equity loan can be good when people need extra money for improvements. He also noted that a home equity loan could be best when owners plan to sell the house shortly after borrowing the money. Because of varying factors in every situation, each homeowner would need to compare the rates of these financial choices and decide for themselves.