My cousin Jason thinks I’m stupid. He tells me this at literally every family gathering. You’re throwing money away! he says while drinking his third beer. But Jason doesn’t know what he’s talking about, and honestly I’m over trying to explain it to him.
So here’s what happened. Our deck was completely shot – like a dangerous shot. My youngest almost fell through a rotten board last summer. Plus three kids sharing two bedrooms was getting ugly. We needed to fix the deck and finish the basement. The contractor said $55,000. We didn’t have that kinda money just sitting around, but we had equity in the house. Been paying the mortgage since 2019 and our neighborhood got pretty popular. Houses were selling for way more than when we bought.
I Thought YouTube Made Me an Expert
I watched maybe three videos about refinancing and felt like I totally got it. This one guy made it sound amazing – lower payment, one loan, super simple. It made sense to me. I found a lender online, filled out their application, and gave them everything they wanted. They called back quickly and said we could refinance, get our cash, and only pay $150 more per month. I was ready to do it right then.
My wife said we should check with our credit union first. Just to compare. I was annoyed because I thought we already had the answer, but whatever. Glad I listened to her.
Linda From the Credit Union Saved Us
Linda works at our credit union. She’s helped us before with car loans and stuff. The first thing she did was look at our mortgage statement. Wow, 2.875% – that’s really good, she said. I didn’t think much of it until she told me current rates were around 7.1%. That’s when I started paying attention.
Linda explained the home equity loan vs refinance difference way better than those YouTube videos. With refinancing, my 2.875% mortgage would be gone completely. Replaced with a brand new mortgage at 7.1% on everything – what we owed plus the cash we needed. We owed $198,000. Add the $55,000 we needed, and the new mortgage would be $253,000 at 7.1%.
She calculated the payment would be around $1,710. We were paying $1,350, so it’d go up by $360. That still seemed okay to me.
Then Linda did something the online lender never bothered with. She showed me total interest over the life of the loan. At our current 2.875% rate, we’d pay about $117,000 in interest over 28 more years. If we refinanced to 7.1% for a new 30-year mortgage, we’d pay over $362,000 in interest. That’s paying an extra $245,000 just to borrow $55,000. I literally felt sick.
Home Equity Loans Finally Made Sense to Me
A home equity loan would be totally different, Linda said. Our original mortgage stays exactly the same. Same 2.875% rate, same $1,350 payment, same payoff schedule. The home equity loan sits on top of it like a second mortgage.
The rate would be higher – she quoted 8.2% – because it’s second in line if something goes wrong. I don’t fully get why that matters but whatever, made sense when she explained it. Here’s the important part though: that 8.2% only applies to the $55,000 we’re borrowing. Not our whole mortgage balance.
So we’d keep paying 2.875% on $198,000 and pay 8.2% on just $55,000. The home equity loan payment would be about $430 a month for 15 years. Add that to our $1,350 mortgage and we’re at $1,780 total. That’s actually $70 more per month than refinancing.
I pointed this out to Linda. She smiled and said but look at the total cost. Over 15 years, we’d pay about $22,400 in interest on the home equity loan. Compare that to paying an extra $245,000 by refinancing. The home equity loan vs refinance question suddenly wasn’t even close.
Why Jason Doesn’t Get It
Jason refinanced his place last year. Got a lower payment, pulled out cash for a truck, thinks he’s a genius. He keeps telling me I should do the same thing. The home equity loan vs refinance debate doesn’t even exist in his mind – refinancing wins every time.
But Jason’s situation was completely different. He bought it in 2018 when rates were higher. His original rate was 5.75%. When he refinanced to 4.5%, he improved his rate AND got cash. Of course that was smart for him.
My rate is already super low. Refinancing would make it worse, not better. I tried explaining this at Thanksgiving, even drew it on a napkin. He just kept saying but my payment went down! Yeah dude, because your starting rate sucked. Mine doesn’t.
This is why I hate financial advice from my family. Everyone thinks their situation applies to everyone else. It doesn’t.
The Closing Costs Thing Nobody Talks About
Linda also broke down closing costs, which the online lender barely mentioned. They said about 2% of the loan amount real quick and moved on. Sounds harmless when they say it like that.
But 2% of $253,000 is over five grand. Linda said realistically it’d be $6,000 to $7,500 with all the fees – title stuff, appraisal, origination fees, other things I don’t understand. That’s a lot just to borrow money.
The home equity loan had closing costs too – about $2,200. Still annoying, but way less than refinancing. When you’re already borrowing money, paying an extra few thousand just to get the loan really hurts.
What We Actually Did
We took out a home equity loan. Our total payment is $70 higher than refinancing would’ve been, but we’re paying way less interest overall. And we kept our awesome 2.875% rate on the big loan. Application took about four weeks. So much paperwork – tax returns, pay stubs, bank statements, everything. Some guy came out and appraised the house.
Got approved, got the money, paid the contractor. The deck’s beautiful now and the basement’s done. Kids are way happier with more space. Worth having two payments? Absolutely.
When Refinancing Actually Makes Sense
Look, I’m not saying refinancing is always wrong. Just wrong for my situation. If your current rate is high and current rates are lower, refinancing is probably smart. You improve your rate and get cash at the same time. Perfect scenario.
My friend Tom refinanced last year. His rate was 6.25% from 2017. Got it down to 5.1% and pulled out cash for solar panels. His payment barely changed and now he saves on electricity. That was definitely the right move for him.
The home equity loan vs refinance choice depends on your current rate. That’s the biggest factor. Got a low rate? Keep it. Got a high rate? Refinancing might be your answer.
What I Learned From This Mess
Don’t trust YouTube videos or articles that make one option sound perfect. A lot of that content is sponsored by lenders who make more money on bigger loans. Not saying everyone’s dishonest, but there’s definitely bias.
Talk to someone local who isn’t pushy. Linda at our credit union showed both options honestly and let us decide. The online lender really pushed refinancing hard. Probably because their commission would’ve been bigger.
Look at total cost, not just monthly payment. This was huge for me. The home equity loan vs refinance comparison looks totally different when you see total interest over the life of the loans.
Closing costs matter more than people admit. Several thousand dollars is real money. Factor that in.
My Honest Take After Living With This
It’s been over a year since we got the home equity loan. I’m happy we did it. Yeah, two mortgage payments is slightly annoying. But we set up autopay so I don’t even think about it. And I’m not losing sleep over giving up a great mortgage rate just to get some cash.
The home equity loan vs refinance question stressed me out for weeks when we were deciding. I went back and forth, second-guessed myself constantly. But once Linda showed us the real numbers – the total cost difference – the choice became obvious.
If you’re trying to figure this out, here’s my advice: check your current interest rate first. That number determines everything. Low rate? Probably go with a home equity loan. High rate? Look into refinancing. Get quotes from multiple places. Compare total interest, not just monthly payments.
And don’t listen to Jason at family dinners. Or your own version of Jason. Everyone’s situation is different, and what worked for them might be terrible for you. Do your own homework, run your own numbers, make your own choice.
The home equity loan vs refinance thing isn’t that complicated once you understand your own numbers. It’s just that most people – including me at first – don’t take the time to actually understand them.