Home Equity Loan Refinancing Navigation | Mortgage

by EddieLamb

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).

When faced with the option of refinancing, do the homework to find out if a home equity loan or refinance is right for you. The basic rule-of-thumb in the "refi" business is that it only makes sense if you can lower your interest rate by 2 or more percentage points. Another thing to look at is the closing costs versus the life of the loan. You must determine how long it will take to break even (paying off the closing costs) and ask yourself if you really plan to stay in your house that long. For most people, it takes roughly 3 years 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 mortgage term is also important. If a property owner wants fast equity growth, then a short term loan would be the best option. Long term loans are usually the better choice when the refinance is needed to pay for a college education or to buy home improvements using the equity in the property.

Read your current mortgage carefully before deciding to refinance. Some mortgages have penalties and fees associated with an early pay off (i. E. You will be charged a fine if you refinance). If these fines are high enough, it might not be worth while to refinance.

If you have decided that refinancing is right for you, then you need to thoroughly investigate all your options to determine the financing that is right for you. Besides knowing if what the annual-percentage-rate (APR) and the loan type (fixed or variable) will be, there are other factors to take into consideration:-The term of the mortgage (how long it will take for you to pay off the loan). Short term mortgages usually have a lower interest rate but have higher monthly payments.

-Points (also known as origination or discount fees). These are fees charged by the lender or broker when the mortgage is signed. The most common equation is that one percent of the loan's value equals one point. While many mortgage companies offer a "zero point" or "no-cost" loan, these should be very seriously scrutinized because they usually turn out to be more expensive in the long run. When deciding to refinance or not, one should determine if paying the points can be justified when comparing them to the savings from a lowered interest rate.

Refinancing can be done in two different ways. The "cash out" refinance is when the original mortgage is refinanced for a larger amount than the balance owed. This guarantees that the home owner will be handed cash at the time of signing. The home equity loan does not touch the original mortgage at all. It is actually a second mortgage based on the equity in the home. Deciding which type of refinance to use should be based on 4 factors: term, rate, cost, and speed. Home equity loans are faster to obtain, are shorter in term, and are quite flexible. Their major drawback is that they tend to have a high interest rate. Whatever the choice, it is important to research all options before signing.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

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