Home equity versus refinance loans for Oklahoma homeowners

Generally, there are two ways to use your home equity to borrow money in Oklahoma. You can either refinance with a new mortgage that is larger than your remaining balance (a cash-out refinance) or get a home equity loan for a line of money. A cash-out refinance is generally cheaper, but a home equity loan will usually let you borrow more money.

Refinance versus home equity loan

Also known as second mortgages, home equity loans come with relatively low rates, tax-deductible interest and low or no closing costs. They typically have loan terms of 5 to 15 years.

Home equity loans have fixed rates and fixed payments while home equity lines of credit are variable-rate loans with payments that fluctuate based on current interest rates and outstanding balances. Usually, line of credit rates change with fluctuations in the prime rate.

With equity lines of credit, borrowers generally get a certain number of years during which they can "draw down" their lines by writing checks against their total available credit lines or using credit cards linked to those lines. After that, they generally have a number of years to repay their balances but can't make additional withdrawals. Unlike first mortgages, many home equity loans come without closing costs.

Both home equity loans and lines of credit in Oklahoma are good sources of money for home improvements or repairs and college tuition bills.

Many borrowers also choose to consolidate higher-rate credit card, auto loan and personal loan balances into their equity lines and loans. Doing so stretches out the amount of time they have to repay their debts, lowering their monthly payments. It also converts nondeductible debt into tax-deductible debt.

HELOC versus home equity loan

Borrowers should consider several things before jumping into either financing product, experts say.

Home equity lines of credit typically are a good deal for those who want a lower upfront rate and access to money at unpredictable times. However, home equity loans are better suited to those who need a specific amount of money and payment stability.

With a home equity line of credit, you open it and you're only obliged to pay for the amount of money you use. With a loan, you get a check and make payments until you pay that amount off.

Both lending devices use a borrower's house as collateral, with lenders in either case appraising the property to determine how much mortgage they are willing to extend.

Comparing HELOCs, home equity loan

There are downsides to borrowing home equity, of course. If your dream is to own your home free and clear, borrowing equity puts you further from the goal. It also raises the overall interest bill you pay.

But experts say the most serious pitfall is that many borrowers don't stop racking up credit card debt after they consolidate their bills with a home equity loan. Statistics show the rapid growth of home equity borrowing hasn't kept credit card debt in check. That means many people who take out equity loans are falling deeper into debt, rather than climbing out of it.

So weigh your options before consolidating debt by borrowing against your home.

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