The Equity Loan Refinancing Dilemma
Consolidating debts has become easy with the emergence of various methods and loans
to enable individuals to pay for their other debts by applying for a new one. For many home owners, the preferred debt consolidation method is by taking up a loan on the equity of their home. However, you might want to take note that by putting your home up as collateral to consolidate unsecured debts such as credit card debts might be quite dangerous as you risk foreclosure should you suddenly become unable to afford the new mortgage payment. When it comes to taking up a loan on the equity of your home, it usually comes down to two options; home equity loan or cash out refinancing. This may be when many home owners face the dilemma of
equity loan refinancing as they may not be entirely sure which option suits them better. Before you even consider the
equity loan refinancing options, it might be better for you to familiarize yourself with the terms and conditions of each option first.
An
equity home loan is when you take up a loan on the difference between the market value of your home and the balance that you still owe on your mortgage. It is considered a separate loan from your primary mortgage but you are still putting your home up as collateral as well. The purpose is to gain access to the equity built up over the years without having to refinance your primary mortgage. Typically, equity loans have higher interest rates than conventional first mortgages and shorter loan terms due to the closing costs and various fees involved in the process of obtaining it. However, you may only be required to pay the closing costs based on the equity loan amount instead of the entire balance of the mortgage on your home.
You may want to consider a home equity loan when the prime interest rate is lower than the average mortgage rate. You may ask your lender to appraise the value of your home and they may lend you cash based on the amount of equity you have built over the years. One advantage of a home equity loan is that you have the option of accessing the cash loan in lump-sum amount or through a series of revolving line of credit. The interest rate you pay may also be tax deductible depending on the regulations of your respective state. However, the loan term for this particular option is significantly shorter than a conventional mortgage so it could also mean high monthly payments for you. Therefore you might want to be sure that you can afford to make such payments before signing up for it.
Cash out refinance is when you replace your primary mortgage with a different loan. Basically you may be applying for a different loan to pay off your first mortgage and obtain cash from the difference between the market value of your home and the balance of your first mortgage. Generally the interest rate for cash out refinance is lower than that of a home equity loan but it may depend on your particular financial circumstances. If you have good credit score you might be able to enjoy the lower interest rate and vice versa. The interest paid may also be tax deductible.
When you opt for cash out refinance you may have higher closing costs than with a home equity loan. So it may be a good idea for you to get your lender to clarify all the related fees so that you will not be surprised later during the term of your loan. Refinancing also might mean that you may be extending the term of your loan. So you may actually end up paying more on your mortgage due to the longer term. However it may significantly reduce the monthly payments you may have to make.
There may be no sure-fire formula to determine whether it is better for you to take a
home loan against the equity or to opt for a cash-out refinance. It may depend on your particular financial situation and capabilities in the present and future. So you might want to consider your options carefully and decide on which method is best for you based on your own analysis of your own financial circumstances.
by: Ask Bill
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