The Day My Neighbor Saved Me From Losing $80,000

Our HVAC died in August during a heat wave. Guy said we needed full replacement – $14,000. Then we found out the electrical panel wasn’t up to code anymore. 

The total was $50,000, maybe more with extra costs that always pop up. We’d been paying the mortgage for eleven years. House value went up – the neighborhood got popular. I figured we had plenty of equity. Started looking into borrowing options and got super confused about this home equity loan vs refinance thing.

How I Thought I Knew Everything

Did what everyone does – Googled it. I read some articles, found a website with a calculator. Put in my numbers and it said my payment would only go up $200 a month. Seemed totally fine to me.

Called the number. The sales guy was really friendly, and made it sound super easy. Said rates were great, we’d get our cash, one simple payment. Could close in two weeks. I was sold. Told my wife I figured it out.

She asked what our current rate was. I didn’t even know. I had to dig out the mortgage statement. It was 3.375%. The sales guy quoted me 6.9% for the refinance. I didn’t think that mattered much because he said payment only goes up $200. Shows how little I understood.

Ron Stopped Me From Being an Idiot

Getting the mail one day, Ron walks over. He’s retired, used to work in banking. We chat sometimes about boring neighborhood stuff. I mentioned we were refinancing for home improvements. I expected him to just say cool or whatever.

Instead he goes what’s your current rate? I said 3.375%. He literally said oh no out loud. Asked what rate they offered for refinancing. I said 6.9%. Ron shook his head. You need to really think about that.

He invited me over to his deck. Spent like an hour explaining the home equity loan vs refinance difference. Ron used to be a loan officer, so he actually knew this stuff. Unlike me reading articles and thinking I was smart.

Ron explained when you refinance, your old mortgage disappears completely. You get a brand new mortgage with a new rate, new term, everything starts over. My 3.375% would be gone, replaced with 6.9% on the entire amount I owed plus the cash.

At 6.9%, that’s way higher than 3.375% on money I’d already borrowed cheaper. Ron said I’d be paying almost double the interest on $176,000 just to get $50,000 in cash. That’s a really expensive way to borrow fifty grand, he said.

I kept saying but the payment only goes up $200. Ron asked how long the new loan was. Thirty years. So I’d be adding 11 years of payments back. No wonder the payment wasn’t going up much – I’d be paying way longer.

Home Equity Loans Finally Made Sense

Ron said a home equity loan is totally different. My original mortgage stays exactly the same. Same 3.375% rate, same payment, same payoff in 19 years. The home equity loan is separate – like a second mortgage on top.

The rate would be higher – probably 7.8% or 8%. That’s higher than the refinance rate, which confused me. 

He did quick math. Home equity loan payment would be around $395 monthly for 15 years. Add that to my current $1,280 mortgage and I’d pay $1,675 total.

With refinancing, payment would be $1,480. So refinancing had lower monthly payment – about $195 less. I pointed this out like I’d caught some mistake.

Ron smiled. Now let’s look at total interest. He pulled out his laptop.

I felt sick. The home equity loan vs refinance choice looked completely different now. Yeah, higher monthly with a home equity loan, but way less overall. Ron said a home equity loan would cost about $21,000 in interest over 15 years. Nothing like a quarter million extra.

Why I Almost Fell For It

The sales guy wasn’t technically lying. My monthly payment really would only go up $200 with refinancing. He just didn’t mention I’d be paying that for 30 years instead of 19, at way higher rate on money I’d already borrowed cheaper.

This is how they get you. Focus on monthly payment because that’s what people care about. Can you afford it monthly? Yeah? Great, sign here. Nobody talks about total cost because that number’s scary.

Ron said this is super common. People refinance without understanding they’re giving up good rates. The home equity loan vs refinance question seems simple but you gotta understand details or you’ll get screwed.

What I Actually Did

Cancelled the refinance. The sales guy was annoyed, and tried saying I was making a mistake. But I knew better after Ron. Got a home equity loan from a local credit union instead. Rate was 7.9%, closing costs about $1,900. Way less than $5,500 the refinance would’ve cost.

That extra $195 monthly hurts a bit. But I kept my 3.375% rate on the big loan and I’ll pay way less interest overall.

Got the money, fixed everything. New HVAC works great, electrical’s up to code, second bathroom upstairs changed our lives. No more morning fights over the shower.

When Refinancing Actually Works

Ron also explained when refinancing does make sense. If your current rate’s high and rates dropped, refinancing is smart. You improve your rate and get cash together. Perfect scenario.

My coworker Sarah refinanced last year. Rates went down, got cash, payment barely changed. That’s using refinancing right.

The home equity loan vs refinance decision depends on your current rate. That’s the most important number. Already low? Keep it. High? Refinancing might save money.

What I Learned

Don’t trust sales people with easy-sounding calculators. They’re selling something and making money when you borrow more.

Talk to someone who doesn’t benefit from your choice. Ron didn’t get paid helping me. He just didn’t want his neighbor making a dumb mistake. Find your own Ron.

Always look at total interest, not just monthly payment. The home equity loan vs refinance comparison looks completely different when you calculate what you’ll pay over the entire term.

My Honest Take

The home equity loan vs refinance question stressed me out until Ron broke it down. Once I understood what I’d actually pay – not just monthly but over time – the choice was obvious.

Check your current mortgage rate first. Good compared to current rates? Protect it with a home equity loan. Bad? Refinancing might help.

Get quotes from multiple places. Talk to people not trying to sell you something. Calculate total interest, not just monthly payments.

And maybe buy your neighbour a six-pack if they save you from an $80,000 mistake.

Disclaimer

The content shared in this article is based on personal experience and general financial understanding. It is intended for informational and educational purposes only and should not be interpreted as financial, legal, or mortgage advice.

Every homeowner’s financial situation is unique, and loan options such as home equity loans, cash-out refinancing, and mortgage terms can vary depending on factors like credit history, income, property value, and lender requirements. Before making any borrowing or refinancing decisions, readers are strongly encouraged to consult licensed financial advisors, mortgage professionals, or loan officers for personalized guidance.