Home equity loans allow homeowners to borrow money using their home's equity as collateral. Homes are our biggest investment. Because of low interest rates, many homeowners are choosing to refinance their homes for lower rates. Lower rates equal a lower monthly payment. On the other hand, some homeowners choose not to refinance, and instead take out a home equity loan.

Home Equity Loans vs. Refinancing Home

Home equity loans are a little different from a refinancing. When a homeowner refinances their property, they can tap into their homes equity and receive a lump sum of money at the closing table. Money received is great for paying off high interest credit cars, home improvement, etc. The lump sum received is wrapped into their new mortgage. For example, if a homeowner owes $100,000 on a property worth $130,000, the homes equity is $30,000. If they borrow $20,000, instead of owing the mortgage company $100,000, the new mortgage amount is $120,000.

When a homeowner receives a lump sum from a home equity loan, the borrowed amount is not wrapped into a new mortgage. Rather, the homeowner takes out a second mortgage. The downside is that home equity loans traditionally have higher interest rates. Because of this, some people are unable to keep up with the monthly payments. This is dangerous because defaulting on a second mortgage has serious consequences. In some cases, homeowners are at risk of losing their home.

Refinancing Your Home Equity Loan

Fortunately, there are alternatives for individuals who receive a high interest home equity loan. Those who receive a second mortgage or home equity loan have the option of refinancing. Although locating rates comparable to a first mortgage is slim, homeowners may receive some great offers from local and online lenders. Refinancing is also ideal when a second mortgage has an adjustable rate. Adjustable rates are risky because they fluctuate according to market trends. Thus, homeowner may experience a dramatic increase in payments. Prior to refinancing a home equity loan, homeowners should be prepared to pay fees. Typical fees include closing costs, prepayment penalties, discount fees, and so forth.