You may have gotten a very good mortgage rate when you purchased, or refinanced your home, but now you are considering the options for accessing your home equity. Should you refinance your existing mortgage and give up your low rate, or take out a new home equity loan? 

Let's say that you have a $350,000 mortgage at 5.5%, with a monthly payment of $1,987, and now you want to get $50,000 cash out. If today’s rates to refinance were 2% higher, your $400,000 mortgage payment would be about $2,797 per month. Compare that to a combined monthly 1st and 2nd mortgage payment of $2,405, which includes $418 for a $50,000 home equity loan at 8%, plus the $1,987 existing mortgage payment.

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In this example, you could save about $392 per month by choosing a home equity loan instead of refinancing. If you wanted to pay off your loan early, the term could be reduced by about 10 years by applying the savings to the payments, which otherwise would have been lost on a refinance.

What if the home equity loan rates are higher because your credit score is lower than you thought, or your home value is less than expected? Using the above example, if the home equity loan rate was 2% higher, your combined payments would still save about $328 per month. 

What about your loan to value ratio? If you were to refinance your mortgage and exceed 80% of your home’s value, the lender typically requires that you buy mortgage insurance, (PMI). The annual policy for our example loan of $400,000 could cost you about $1,500, which is $125 per month.  A home equity loan does not require any mortgage insurance, regardless of the loan value. 

The amount that can be saved by using a home equity loan is relative to the balance of your existing mortgage. The larger your mortgage balance, the more you can potentially save. Your savings is also relative to the difference between your current mortgage rate and today’s available rate.