What is the difference between a home equity loan and a refinance?

A home equity loan and a refinance both involve a homeowner’s existing mortgage. The difference is that a home equity loan allows a homeowner to use the equity in their home to secure additional financing. Equity is defined as the difference between a home’s value and the amount owed to the lender. For example, if a home is worth $200,000 and the amount owed to the lender is $100,000 then the equity in the home is $100,000. A home equity loan uses the existing equity in the home as collateral to secure additional funds. The homeowner receives this additional cash in a lump sum and makes fixed, monthly payments over a set period of time to pay back the loan. It is important to note that the creditor has a lien on the property and can potentially foreclose if the borrower defaults on payments. A refinance, on the other hand, is the process of replacing an existing mortgage with a new one. With a refinance, the homeowner applies for a new mortgage at a lower interest rate and pays off the existing mortgage. The homeowner now has a new loan and the same amount of equity in the home. In Virginia, mortgage law generally requires a homeowner to have at least 20% equity in their home in order to qualify for either a home equity loan or a refinance. This is to ensure that the homeowner has enough cash to pay out the existing loan before taking out a new one.

Related FAQs

What is a good credit score for a mortgage?
What is loan origination?
Are there any mortgage programs for first-time homebuyers?
What is a good faith estimate?
What is a "point" on a mortgage?
What is an adjustable rate mortgage (ARM)?
What is a loan-to-value ratio?
What is a subprime mortgage?
What is a first mortgage?
What is the difference between a fixed rate and an adjustable rate mortgage?

Related Blog Posts

What Home Owners Need to Know About Mortgage Law - July 31, 2023
The Basics of Mortgage Law: A Comprehensive Guide - August 7, 2023
Understanding Prepayment Penalties and Mortgage Law - August 14, 2023
Securing Your Mortgage Loan: Key Considerations Around Mortgage Law - August 21, 2023
Refinancing Your Home Loan: What Mortgage Law Protects You - August 28, 2023