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Home Loan Refinance vs. Line of Credit: What’s the Difference?



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A home loan refinance involves replacing your existing home loan with a new one, typically with a lower interest rate or more favorable terms. When you refinance, you essentially take out a new loan to pay off your old one.

One of the main advantages of a home loan refinance is that you can often secure a lower interest rate than you had on your original loan. This can lead to lower monthly payments and significant savings over the life of the loan.

Another benefit of a home loan refinance is that you can use the equity in your home to access cash for things like home improvements, debt consolidation, or even to purchase a second property. With a cash-out refinance, you borrow more than you owe on your existing loan and receive the difference in cash at closing.

Line of Credit

A line of credit, also known as a home equity line of credit (HELOC), allows you to borrow against the equity in your home. With a HELOC, you can borrow funds as needed up to a pre-approved credit limit.

Unlike a home loan refinance, a line of credit typically has a variable interest rate, which means your monthly payments can fluctuate based on market conditions. However, some lenders may offer fixed-rate options for a portion of the credit line.

One of the advantages of a line of credit is that you only pay interest on the amount you borrow, not the entire credit limit. This can be a cost-effective way to access funds when you need them, without incurring additional interest charges on money you don’t use.

Another benefit of a line of credit is that it can provide you with flexibility in terms of repayment. You can typically make interest-only payments during the draw period, which is usually the first 5-10 years of the loan term. After the draw period, you’ll be required to make principal and interest payments.

Key Differences

The main difference between a home loan refinance and a line of credit is how you access the funds. With a home loan refinance, you receive a lump sum of cash at closing, which you can use for various purposes. With a line of credit, you have access to a pool of funds that you can borrow from as needed.

Another key difference is the repayment structure. With a home loan refinance, you make fixed monthly payments over the entire loan term. With a line of credit, you have more flexibility in terms of repayment, including the ability to make interest-only payments during the draw period.

Lastly, the interest rates for these two options can vary. Home loan refinance often comes with a fixed interest rate, while a line of credit usually has a variable interest rate. This means your monthly payments can fluctuate with the latter.

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