Okay so here’s the deal – I needed a new kitchen. And I mean NEEDED, not just wanted because I saw something pretty on Pinterest. The cabinets were literally coming off the walls. There was definitely a mouse situation happening behind the dishwasher that I don’t even want to get into. Got so bad my wife just… stopped cooking. Completely. We were spending an insane amount on DoorDash and it was getting ridiculous.
The contractor comes over, gives me the quote. $47,000. I legitimately almost fell over. But he walked me through everything and yeah, it was pretty bad. The good news? We’d been paying our mortgage for almost twelve years and the neighborhood had gotten way more expensive. So we had equity. That’s when I started going down this rabbit hole of home equity loan vs refinance and wow, I was so confused.
I Thought I Knew What I Was Doing Narrator: He Did Not
I walked into my bank all confident. I’d read some stuff online, talked to my buddy Dave who refinanced his place. Figured I had the basics down.
The loan officer – her name was Patricia, super nice lady – basically had to explain this like I was five. And honestly? I needed that.
So I thought refinancing was like hitting reset on your entire mortgage. Home equity loan was just borrowing extra money on top. The second part I actually got right somehow. But interest rates? Closing costs? No clue.
The home equity loan vs refinance decision really comes down to your current rate and how much you’re borrowing.
Patricia asks me what’s your current mortgage rate? and I’m just standing there like an idiot. I had to call my wife because I genuinely didn’t know. She tells me it’s 3.875%. Patricia goes oh that’s really good, especially since rates are around 6.5% right now.
Then she says if I refinance, I’d be giving up that rate. And that’s when it clicked – oh shit, rates matter.
The Home Equity Loan Thing
So a home equity loan is basically just a second mortgage. That’s it. Your first mortgage? Stays exactly the same. Same payment, same interest rate, all of it. You’re just adding a second payment on top.
Patricia pulls up my house on their system – apparently it’s worth about $385,000 now. We still owed $214,000. So we had around $171,000 in equity, which blew my mind. She said I could probably borrow up to $120,000 if I really wanted to, but I only needed the $47,000 for the kitchen.
The interest rate was gonna be higher – she quoted me 7.2%. I asked why it’s higher if it’s the same house, right? She explained something about the second position which basically means if we ever defaulted and the house got foreclosed god forbid, the first mortgage gets paid back first. So the second lender is taking on more risk. Higher risk = higher rate. Makes sense when you put it that way.
My current mortgage payment would stay at $1,450 like always. The home equity loan would add another $380ish per month. So in total I’d be paying $1,830.
Closing costs were around $2,100. Appraisal, title fees, some other stuff. Way less than what refinancing would cost. She said we could close in about three weeks.
Almost Made a Huge Mistake Thanks to My Cousin
Here’s where I nearly screwed everything up. My cousin – who gives financial advice to literally everyone even though he’s a plumber – calls me an idiot for not refinancing. Says I should do a cash-out refinance, that I’d get a lower payment, save all this money, blah blah blah.
So I go back to Patricia and ask her to explain refinancing too. And this is where the home equity loan vs refinance comparison got really interesting.
With refinancing, I’d be getting a completely new mortgage that pays off the old one. If I wanted the $47,000 for the kitchen, the new mortgage would be around $261,000. That’s the $214,000 I still owed PLUS the $47,000 cash. But the interest rate would be 6.5% instead of my current 3.875%.
Patricia runs the numbers. The new payment would be about $1,650 per month. Which is actually $200 LESS than if I kept my current mortgage and added the home equity loan payment $1,830.
I literally called my cousin back feeling so smart. Like ha, look at this, lower payment!
But then Patricia stops me and pulls out this chart showing total interest over time. And here’s the thing – yes, my monthly payment would be lower with refinancing. But I’d be paying that 6.5% interest on the ENTIRE $261,000. Not just the $47,000 I was borrowing. Over the life of the loan, I’d pay something like $80,000 more in interest compared to just keeping my current mortgage and taking the home equity loan.
Lower monthly payment but way more money in the long run. Then she explained it like this – I’d basically be trading my 3.875% rate for a 6.5% rate on $214,000 that I’d already locked in at the better rate. Just to get $47,000 in cash. When she said it like that, I felt pretty stupid for almost falling for it.
Closing Costs Matter More Than You Think
Patricia said refinancing would cost me somewhere between $5,000 and $7,000 in fees. The home equity loan was only about $2,100. That’s a huge difference just in upfront costs.
Some people told me to look for those no closing cost refinances. But when I actually read the fine print my wife made me, they were just rolling the costs into a higher interest rate instead. So you’d pay an extra 0.25% or whatever in interest over 30 years. That ends up being WAY more than $6,000 when you actually do the math.
What I Actually Did
Ended up going with the home equity loan. My situation was pretty specific though. I had that good 3.875% rate that I really didn’t want to give up. I knew exactly how much I needed. And I could handle making two separate payments without it stressing me out too much.
The home equity loan vs refinance decision really comes down to your current rate and how much you’re borrowing.
The application process wasn’t horrible. I had to give them pay stubs, tax returns from the last two years, bank statements. They sent an appraiser out who actually valued the house at $392,000, even higher than the estimate. The whole thing took about 22 days.
Now I’ve got two mortgage payments every month. The original one is $1,450, and the home equity loan is $378. Is it annoying? Yeah kind of. But I set them both up on autopay so I don’t forget. And knowing I kept that low rate on the bigger mortgage makes me feel like I did the smart thing.
When Refinancing Actually Makes Sense Though
Look, I’m not saying home equity loans are always the better choice. My neighbor Jerry refinanced last year and it worked out great for him. His original mortgage rate was like 6.75% from when he bought it back in 2018. When rates dropped, he refinanced to 3.25%. His payment went down almost $400 a month even though he took out $35,000 cash for a new roof and HVAC.
Jerry’s situation was totally different. He was improving his rate AND getting cash at the same time. That’s the perfect scenario for refinancing.
Also if you want to change your loan term, refinancing is how you do that. My buddy Tom refinanced from a 30-year to a 15-year mortgage. His payment went up but he’s gonna save probably like $150,000 in interest and own his house way faster.
Stuff I Wish Someone Had Just Told Me
First – check your current mortgage rate before you do literally anything else. If it’s really low compared to what rates are now, you probably don’t want to refinance unless you absolutely have to.
Second – think about how long you’re actually staying in the house. We’re planning to stay here until our kids graduate high school minimum. That’s at least another 8 years. So long-term savings made sense for us. If you’re moving in like two years, the whole math changes.
The home equity loan vs refinance decision really comes down to your current rate and how much you’re borrowing.
Third – get quotes from a few different places. I only talked to my bank at first but my wife pushed me to check with a credit union and one of those online lenders too. Shopping around probably saved us $600 or so.
Also nobody really talks about the tax stuff. The interest on my home equity loan is tax deductible because I used it to improve my home. If I’d used that money to buy a boat or go on vacation, I couldn’t deduct the interest. Keep receipts for everything because the IRS can ask for proof.
The Kitchen Actually Turned Out Amazing
Just wanted to mention – the kitchen looks incredible now. New cabinets, new countertops, new appliances, everything. My wife is actually cooking again which means we’re saving a ton on takeout. The contractor finished slightly over budget because of course he did, but we had enough cushion in the loan to cover it.
Was it worth adding another mortgage payment? 100% yes. The house is worth more now, we enjoy it way more, and we’re not embarrassed when people come over anymore.
The whole home equity loan vs refinance thing kept me up at night for a while there. But once I actually understood the difference and ran the numbers for MY specific situation, the choice became pretty obvious. I kept my good mortgage rate, borrowed exactly what I needed, and got the kitchen my wife wanted.
Final Thoughts
If you’re trying to decide between these two, here’s my advice. Figure out your current mortgage rate first. If it’s low, protect that thing. Don’t give it up unless you absolutely have no other choice. A home equity loan lets you keep that good rate while still getting the cash you need.
If your rate is high or you want to change your loan terms anyway, then yeah refinancing makes way more sense. You might as well get the cash out while you’re already redoing the whole mortgage situation.
And seriously, talk to someone who actually knows this stuff. I thought I could figure it out from Google and Reddit but Patricia at the bank explained things in a way that actually made it click. Doesn’t have to be a bank – could be a credit union, could be a mortgage broker – but talk to a real person who can run the actual numbers for your specific situation.
The home equity loan vs refinance decision really comes down to your current rate and how much you’re borrowing. For me, keeping that 3.875% rate was worth dealing with two payments. For someone else with a higher rate, refinancing might save them thousands. There’s no one-size-fits-all answer.
Oh and don’t listen to your cousin’s financial advice unless they actually work in finance. Just trust me on that one.
