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Home Equity Loan Refinancing - A Homeowner’s Guide

The current housing market has brought about an interest rate range that is very, very low. Naturally, many homeowners are tempted to refinance their mortgages to take advantage of this phenomenon. But, all mortgages are not created equal and not everyone’s financial situation is the same. Refinancing, despite the low interest rates, is not always the right choice. While reducing and consolidating debt is usually a good reason, home equity loan refinancing for the purpose of buying luxury items (i. E. Cars, boats, vacations) can actually lead to hardship (an potentially a foreclosure).

It is best to thoroughly research all information to determine if refinancing is the right choice for you. The most fundamental rule for deciding to refinance is making sure that the new interest rate is at least 2 or more percentage points lower than your current rate. The second thing to consider is the life of the loan versus the closing costs. This means you need to find out how long it will take you to break even after paying the closing costs compared to how long you plan to stay in your house. On average, it takes 3 years for most people to break even.

The loan type your have compared to the loan type you are looking into should also be considered. Those with variable rate loans may want to switch to fixed rate loans for the peace of mind that an unchanging monthly payment brings. Some want to refinance to another adjustable rate loan but want to purchase one that offers some protection like payment caps or lower starting rates.

The total life of the loan should be taken into consideration. Some homeowners wish to build equity fast and want to switch to a short term loan to achieve this. Then there are people who want or need to do home improvements or pay for college tuition and they find that the equity in their homes will help them achieve this.

Not all mortgages are “refinance friendly.” In fact, some assess fines against the property owner for early pay off. The current home loan should be read carefully to determine if these fines apply. Sometimes the fines are so expensive that the savings from a refinance just isn’t worth it.

After deciding to refinance, it is then important to determine what type of refinancing or home loan meets your needs. The APR (annual- percentage-rate) and the type of loan (ARM or fixed) should factor in, but also other items should be considered:-The length of the loan. While short term home loans generally have a low interest rate, they usually have a higher monthly payment.

-Origination or discount fees (also known as “points”). These are fees payable to the lender at the time of closing and one point represents one percent of the mortgage’s value. In recent years, many mortgage companies have been offering the “no-cost loan” (zero points), but these loans have many serious pitfalls that can turn out to be quite expensive (and risky). The amount in fees, or points, balanced against the lowered interest rate should be factored into any refinance decision.

There are two ways that a mortgage refinance can play out. The first type of refinance is called a “cash out.” The other type is what is commonly known as a home equity loan. When someone “cashes out” they are refinancing their current mortgage at a higher amount than is currently owed so that they will be handed cash when the loan closes. Home equity loans do not refinance the current mortgage at all. They are just second mortgages based on the equity in the property. Deciding which type is best for you, you need to consider the rate, cost, term, and speed. Home equity mortgages tend to have a higher interest rate but they are balanced out with being faster to obtain than a cash out refinance, being a shorter term loan, and having much flexibility. Investigate all avenues before deciding what home finance option is right for you.