In order to understand the complexity of refinancing, one should know that there are two variants of home equity loans. The one that is actually a loan has fixed rates for a predetermined period during which the loan is repaid. This type also has fixed monthly instalments. As it is not a too flexible option, home equity loan is recommended for those who know exactly what their personal finances and possibilities are. Thus, knowing how much one needs and how much one can repay monthly is essential for this product.

This first type of home equity loan also offers the chance to consolidate one’s various debts. So if one has credit card, student or car loans, and wants to combine these with some special home improvements, it is a very good option to use a home equity loan to put all the previous elements together, and transform them into a single payment. This united payment is very probable to be lower than the total costs of the various loans.

Moving on to the second type, one must know that it is not a ‘real’ loan, it is called ‘home equity line of credit.’ This type is more flexible than the equity loan: it is open-ended, usually has variable interest-rates and monthly payments. Practically a line of credit is the same thing as the credit card but compared to this, it has some additional tax-benefits. One needs to pay interest only for that amount of money that is being used, with the rest remaining available for future purposes. Creditors most of the times provide a card for the borrowers’ convenience. This line of credit is a better choice for those who do not need funds urgently and/or want flexibility in order to have borrowing opportunity when needed without having to go through the crediting-process again and again.

Focusing on refinancing a mortgage, people should know that for having remained equity, they are offered a home equity loan or an equity line. Home equity loan may be a good choice for those who have debts that were not included in the original mortgage. Including all of one’s debts into a single loan is very advantageous most of the times: it is more time and energy-saving, it is more convenient and usually it comes with better terms.

Nevertheless, sometimes it is better to have two loans, with the larger being less than 80% loan-to-value. This way one may benefit from very good rates, due to the lender’s very low risk. Generally speaking, the lower one’s loan-to-value is, the better the interest rates are. Moreover, if one manages to take out a loan of less than 80% of the collateral’s estimated value, he/she escapes from the costly PMI, namely from paying the Private Mortgage Insurance.

Finally, it may happen that one does not need a second loan while refinancing the first. This is the typical case when lending companies still offer the line of credit which can be very useful in the future even if one does not use it in the present. A line of credit is recommended mainly for security-reasons: when one needs it, he/she can take advantage of it very easily. The primary advantage of this product is that when one needs money, he/she does not need to go through the complex application process to obtain the funds. Without having to wait for a long time, one’s fund-request is approved. Another advantage of the line of credit is that the same appraisal can be used as for the first loan. However, one still needs to request information concerning the possible annual fees for their lines of credit. This might make the product disadvantageous, but special programs and offers exist to compensate or even annul this cost.

All in all, both a home equity loan and line can be advantageous in certain circumstances. Nevertheless, one needs to study the different options carefully prior to deciding on which is the best. All of the costs and hidden charges should be taken into consideration besides the existing advantages of these products.