Equity Loan - When Does Refinancing Make Sense?
the last two years, interest rates have been much lower than anytime
during the last thirty years. This has resulted in an unprecedented
boom in real estate sales, home refinancing and home equity lending,
as borrowers try to take advantage of these rates for the long term.
But refinancing or even borrowing against your home’s equity may
not make sense for everyone. When is it a good idea to refinance
your home? When is it not advisable?
Traditionally, lenders advised homeowners not to refinance unless
doing so would lower the interest rate on the loan by 1-2%. While
anyone who can save 2% on their interest rate would almost certainly
benefit from doing so, others might find refinancing worthwhile
even with a smaller reduction in the interest rate. Increased competition
among lenders has brought the costs of refinancing down in recent
years, so homeowners can realize a significant reduction in their
home payments with reductions of ½% or so, depending on the size
of their mortgage.
The key to whether or not refinancing makes sense is how long the
homeowner intends to remain in his or her home. The costs of the
refinancing, which can run $1000-2000, are amortized over the life
of the loan. For many people, a reduction of $50 or more in the
house payment would be more than enough to justify a new mortgage.
If payments cannot be reduced by at least that much, or if the homeowner
plans to live in the home only a short while, refinancing may not
be a good option.
Refinancing may also make sense for those with Adjustable Rate Mortgages
(ARMs.) At the moment, at 30-year fixed-rate mortgage is quite competitive
with an ARM, and may actually be cheaper. With rates at historic
lows, an ARM can only adjust upward, making it a less desirable
choice in comparison with a fixed-rate loan.
Anyone considering a home remodeling project or debt consolidation
might ordinarily think of a home equity loan or line of credit.
These are often wise choices, as they offer deductible interest
and great repayment flexibility. On the other hand, a chance to
obtain a 30-year loan at 5% might make a complete refinancing with
a cash-out option a better choice, as home equity rates are somewhat
higher than first mortgages.
A new mortgage might also make sense for anyone with a second mortgage
or a piggyback loan. A piggyback loan is a second loan used at the
time of a home’s purchase to help the buyer avoid paying the sometimes-expensive
private mortgage insurance. Simultaneous payments on two mortgages
will be higher than paying on one, so this might be a great time
to roll them together on a refinance. The same applies to anyone
carrying a large credit card balance; that money could be rolled
into a home loan with deductible interest at a lower rate. Anyone
considering such a move should be careful, however, as failure to
repay that debt could lead to home foreclosure.
Now is a great time for any homeowner to consider whether or not
a new mortgage could help lower their payments. With interest rates
as low as they are now, the timing is great, and there’s nowhere
for the rates to go but up.
© Copyright 2005 by Retro Marketing.
Charles Essmeier is the owner of Retro Marketing, a firm devoted
to informational Websites, including End-Your-Debt.com, a Website
devoted to debt
consolidation and credit counseling information and HomeEquityHelp.net,
a site devoted to information on
mortgages and home equity loans