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Refinance vs.
home equity loans
Most banks set
their home equity lines of credit interest rates
with the shortest-term market rate of all, the
Wall Street Journal prime rate. The rate moves in
with the Fed funds rate.
The Fed is currently
raising rates. Home equity lines of credit are
seeing higher rates for both new and existing
borrowers, because most have variable interest
rates.
You can usually secure
an equity loan or a line of credit without paying
closing costs, resulting in $2,000 to $3,000 less
than a mortgage. It is usually best to take a home
equity loan over a mortgage finance if it will
give you the amount of money you need at the terms
you are looking for.
If you are looking to
pay off a small loan quickly, a home equity loan
is perfect for you. Banks offer their lowest rates
on short-term equity loans.
Long-term equity loans,
however, have higher rates than fixed-rate
mortgages. If you need over $75,000, you will
probably find that you have to have a mortgage to
keep your payments affordable. Most equity loans
are due within 10 to 15 years, but first mortgages
can amortize for 30 years.
If you were lucky
enough to secure your first mortgage at an
extremely low rate, then you most likely will want
to consider a home equity loan. You should
refinance into a new mortgage at a larger balance
for a higher interest rate. You would have to pay
closing costs also.
If you believe that
rates won't rise for a while, an equity line of
credit may be the best option for you. When rates
are going down, you don't want to be locked into a
mortgage with a higher rate.
But even if rates don't
remain stable or fall, a line of credit is a lot
more flexible than first mortgage refinances. You
will only have to pay interest on the money you
have outstanding. If rates look like they will go
up, you can pay off what you owe and not charge
anything until the rates come back down.
Cash-out refinance
customers get all of their money at once and have
to pay interest on all of it until the loan is
paid off.
When you borrow money
with an equity loan or line of credit you should
look carefully at any additional closing costs.
Some lenders charge additional fees when the loan
is in the first-lien position.
The vast majority of
lenders waive the costs on equity loans and lines
of credit because there isn't all of the paperwork
involved as in a mortgage. Usually, your property
will even be appraised using a computerized
property valuation. Title searches will be
conducted, but no new title insurance will be
required.
If you own your house
free and clear, there are no recent mortgage
documents for the bank to look at. Therefore, the
bank may go through all of the same steps that
first mortgages require.
Whether a home equity
loan or a refinance is best for you depends on
your individual situation. Examine all of your
options closely and make your decision based on
your financial plans.
Cash Out
Refinance
In a cash out
refinance, determine the balance of your mortgage,
and the amount of cash you are taking out plus any
closing costs. The total is your loan amount. An
appraiser will determine the value of your
property which will be used to determine your Loan
to Value (LTV).
One way to make a refinance
work for you is to refinance for more than the
balance remaining on your old mortgage -- in
effect, tapping your home equity, or "cashing
out," . Thanks to favorable rates, you may be able
to do so without increasing your monthly
payment. | 
Equal Housing
Opportunity (c)
Copyright 2006 #1 American Financial
(1AmericanFinancial.com)