Do you lose home equity when you refinance your mortgage?
Considering that mortgage rates have declined significantly over the last several months, you may be wondering if it makes sense to refinance your home. After all, even a small drop in your mortgage rate could make a significant difference in the total amount of interest you pay over the life of the loan.
But if you're thinking about refinancing your home, it's important to know that doing so could impact more than just your interest rate. For example, you may wonder how changing your mortgage may impact your home equity. Considering that the average American homeowner has nearly $200,000 in home equity right now, yours can be a valuable financial tool if you need to borrow money.
So, do you lose home equity when you refinance your mortgage? Well, it depends on the type of refinance you opt for — and there may be ways to avoid it entirely.
Find out how much home equity you can tap into now.
Do you lose home equity when you refinance your mortgage?
When you take advantage of a traditional mortgage loan refinance, you won't see a decrease in your home equity. That's because you're refinancing the principal balance of your mortgage rather than borrowing money from your home's equity.
On the other hand, the amount of your home's equity is typically decreased if you borrow money with a home equity loan or a home equity line of credit (HELOC), as you're using the equity as a source of funds for borrowing. In turn, your home's equity is lower until the money you borrowed with the home equity loan or line of credit is paid off.
That said, this may be a great time to tap into your equity with a home equity loan or HELOC. Not only does your home's equity offer a way to borrow a large amount of money, but these loans also typically come with lower interest than personal loans or credit cards. For example, today's average home equity loan interest rate is 8.92% while the average interest on a credit card is over 20%.
Here are a few reasons it could make sense to borrow with a HELOC or home equity loan:
- You need to pay off high-interest debt: Your home equity can help you pay off high-interest credit card debt and personal loans at a lower rate.
- You need to make home repairs: Roofs, electrical components and HVAC systems don't last forever, and repairing or replacing them can be costly. A home equity loan or HELOC can be a source of funds to make those repairs.
- You have expensive medical bills: You can also tap into your home's equity with a HELOC or home equity loan if you need to cover expensive medical bills.
Use your home equity to reach your financial goals today.
When you can lose home equity when refinancing
There are some cases in which you may lose home equity when you refinance, like when you're using a cash-out refinance.
"With this option, homeowners can access the equity they've built in their home and convert it to cash," says Eileen Tu, vice president of product development at Rocket Mortgage. "The homeowner takes out a new home loan on their property for a larger sum than what they owe on their original mortgage loan and then receives the difference between those two loan amounts in cash."
That said, a cash-out refinance may make sense if you're already planning to refinance your home and also need access to a large sum of money to pay off debt, make home repairs or renovations or meet another financial goal.
Explore your top cash-out refinancing options online here.
The bottom line
You don't have to lose any equity when you refinance, but there's a chance that it could happen. For example, if you take cash out of your home when you refinance your mortgage or use your equity to pay closing costs, your total home equity will decline by the amount of money you borrow. However, it may be worth tapping into your equity with a home equity loan, HELOC or cash-out refinance if doing so helps you achieve your financial goals.
