A Guide To Home Equity Loan Refinancing

Interest rates on home loans are at an all time low because of the current housing crisis. This has led many a homeowner down the road to refinance, but refinancing a home mortgage isn't for everyone. In fact, refinancing can be the wrong choice for some. Those who wish to refinance to fund the purchase of high-ticket non-essential items such as boats, cars, and vacations will find that a refinance just might be the ticket to "foreclosure land." Generally, home equity loan refinancing is sound judgment when it is used to reduce and consolidate debt and other responsible measures.

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.

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 worthwhile to refinance.

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 (Adjustable Rate Mortgages [ARM] or fixed) should factor in, but also other items should be considered such as, for instance, the length of the loan. While short-term home loans generally have a low interest rate, they usually have a higher monthly payment.

Points (also known as origination or discount fees) 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.

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.