Reed Pirain is an award-winning real estate agent from Pittsburgh, Pennsylvania. Reed has sold millions of dollars in properties and is recognized as a top sales agent in Metropolitan Pittsburgh. In the following article, Mr. Pirain explains refinancing and borrowing against home equity in the market today, and which is more beneficial for the average homeowner.
With so many borrowing options for homeowners, it can be challenging to determine the best course of action when it is time for a new loan. In today’s economy, is it better to refinance or borrow against home equity?
The answer to this depends on a few factors according to Reed Pirain. If the goal is to lower monthly payments and current interest rates are lower than the existing loan, it may make sense to refinance. If interest rates are higher than the existing loan or the home is not a long-term investment, borrowing against the home’s equity may be a better option.
Reed Pirain discovers more about what makes each option the better choice depending on the unique situation of the borrower and explains below.
Interest Rates in Today’s Economy
Before making any decision about what type of loan is best, it is important to know the interest rate of the existing loan in order to compare it to current rates says Reed Pirain. Bloomberg maintains a list of current rates, as they are subject to change. Their table displays the rate for a variety of refinance and home equity options.
In the year 2020, interest rates hit an all-time low with the Federal Reserve setting it at 0.5%. Interest rates remained at an all-time low until they began to rise to combat inflation in March of 2022. To learn more about the history of interest rates, read this article by Bankrate.
Depending on when the existing loan was funded, it may be a good option to refinance as rates still are at historic lows says Reed Pirain.
When Refinancing may be the Best Option
If the main goal is to lower monthly payments or pay off a mortgage faster, refinancing may be the best option. For example, 15-year-fixed mortgage rates are substantially lower than 30-year rates, and both are lower than a home equity loan explains Reed Pirain.
Also consider the closing costs associated with each loan. Shop around for competitive deals on closing costs, but keep in mind that closing costs for a refinance loan are typically higher than those of home equity loans.
Reed Pirain explains that if the home isn’t going to be a long-term holding, the additional closing costs of a refinance may not be recuperated compared to those of a home equity loan, even with the lower interest rates.
If extra cash is needed for home improvements, to finance education expenses, or for a major purchase, a home equity loan may be a good option.
When a Home Equity Loan may be the Best Option
Reed Pirain explains that when cash is needed for a major expense, it may be best to get a home equity loan. Although the interest rates are higher, the closing costs are typically lower. Depending on the rate of the current loan and the amount borrowed, the overall cost may be equal as only a portion of the home’s overall value is borrowed against, rather than refinancing the entire loan.
This option is particularly viable if the home is not being held long-term. If the home will be sold within the next few years, the closing cost savings of a home equity loan may save more money in the long run than the lower interest rate offered with a refinance says Reed Pirain.
A Third Option: Home Equity Line of Credit
Another option that shouldn’t be overlooked is the home equity line of credit (HELOC). Rather than getting a lump sum all at once, the HELOC allows users to borrow money against the equity of their home over time, much like a credit card.
Like refinances and home equity loans, HELOCs also have closing costs. Many also have requirements such as minimum withdrawals, maintenance fees, and inactivity fees.
Interest rates on a HELOC loan are often lower than refinance loans, so this may be a great option for certain borrowers.
It is important to understand all the requirements and restrictions of a HELOC before deciding whether this option is best in any given situation. Reed Pirain explains more about HELOCs in future articles.
Final Thoughts Considering Today’s Economy
Taking out any loan is a major commitment that requires careful consideration of every option. Like so many other things in life, there is no right answer that works for everyone. There are many variables involved that makes the decision unique to each borrower.
With rising interest rates, many think they have missed the boat when it comes to getting a great rate on a new loan. It is important to consider, however, that although rates have risen in recent months, they are still at historic lows. Now may indeed be the best time to take advantage of a new loan.