Refinancing Loan

Home equity loan and refinancing are two excellent ways that can help you manage your finances. However, it may prove difficult to choose one from the other and should depend on what your financial goals are. You can opt for the lower payment schemes of cash-out refinancing, or you can choose the great tax benefits offered by a home equity loan. The choice, however, does not prove to be as simple as this. Here is a comparison of these two types of loans to help you see which one is right for you.

Cash-out refinance simply means that you are refinancing your existing mortgage in order to lower your monthly payment and/or your current interest rate, and get some additional cash for other pressing reasons such as for home improvement, renovation, and the likes. If you are lucky to choose the right timing, you may be able to get all these with cash-out refinancing. Say, your home is valued at $300,000 and your existing mortgage balance is $200,000, your home equity remains at $100,000. You are free to borrow the remaining equity as you deem necessary.

Home equity loans are usually provided in two kinds: the home equity line of credit and the home equity installment loan. A home equity line of credit line means that you are borrowing against the value of your home; your home is your collateral to the credit. Home equity plans are usually set at a fixed time; say 10 years but with variable loan rates. Your interest rate and the annual percentage rate of your mortgage can move up and down depending on the market trends. During the specified time, you are free to obtain the cash when you need it, and pay only for what you happen to spend. Some mortgages are offered with payment of full outstanding balance, while others allow repayment over a fixed time.

On the other hand, an installment loan is a loan that has a fixed rate that stays the same all throughout the rest of your home equity loan terms. Also called the closed end home equity loan, you amortize your loan for periods lasting up to about 15 years. In this kind of loan, you usually receive a lump sum at closing depending on your home value, and you can not borrow further afterwards.

Which is better?

Remember that interest rates do not usually behave normally, much as you want them to. When this happens, home equity loans may actually prove cheaper than refinancing, although they are potentially riskier. Choosing what is better between the two should depend on individual circumstances. For example, if you plan to pay off your mortgage and do not need as much money, you can go for a home equity loan to get lower rates and shorter terms. On the other side of the fence, with cash-out refinancing, you can get all your money up front and simply pay off interest and principal on a lowered monthly basis as agreed upon, with no frills. Weigh carefully based on what your financial objectives are and choose one which you think will give you a fairer deal.

By: Alan Lim

Your home may be your castle, but it can also be a source of ready cash. If you have owned your place for a few years, done some improvements, or maybe just live in a high-demand area, you can have considerable equity. That equity can be converted into money through one of several different instruments. The chore is to find out which one is right for your situation.

Making the decision to pull some of the equity from your home is only one of the numerous choices you will face before you sign your name to paper.

Refinance – If your original mortgage rate is higher than today’s rate of interest, if the length of your loan or the size of payments are wrong for you, or if some terms of your mortgage are making your life difficult, this may be your best choice.

Second Mortgage – If you just want to keep the sweet deal you have on your first, or today’s terms are less than best, this can give you the tool to utilize that money accruing in your home.

Home Equity Loan – Flexibility is the keyword of this choice. You can take a little now and take even more as you need it to finance a trip, home improvements or an education.

You can use a fixed rate over a set period of years, or can base your interest rate on the market. If your personality demands riding the market, or if it demands the known quality of a set rate for a set time, you don’t need to analyze anything. Just gamble on your ability to pull off whichever type looks best to you. If you are like most of us, you will want to consider some of the variables and identify which fits your financial profile best. This requires some research.

Fixed Rate

The interest rate on home loans has been the lowest in decades. The Prime Rate, a component of your mortgage interest rate calculation, was 20.5% in 1981. It took 4 years for that rate to fall below 10%. It hovered in the 7 – 7.5% range for a year in ‘86-’87, and bounced back up to 10% in ‘88. In 1991 a decline dropped the prime 3.5 percentage points in one year. It remained in the 6% range for 2 years and then played with the 8 – 9% range until 2001 when it got back to 6%. By the end of 2001 the rate had hit 4.75% and stayed in that neighborhood for almost 3 years, dropping as low as 4%. Since July 2003, the rate has slowly climbed to the current 8%.

So what does all this economic history have to do with your getting some money? It’s a track record to look at to help predict how that rate is going to change in the next few weeks, months or years. Because that rate should be of prime concern to you in selecting which loan structure is best.

Adjustable Rate

This structure has gained popularity because of the ever-increasing home prices in demanding markets. It’s also a great tool for the first time buyer. It allows the purchaser to be creative in putting together a package of several options, enabling them to get into a home with minimum down, lower initial payments and provides time to decide if it works best. That means that you can purchase that house now before the price goes up, yet have a built-in option to change it in a few years. Since so many people move within 5 years – the common first step in an adjustable rate mortgage – it allows lower living expenses for the soon-to-move homeowner. This is especially helpful in high cost neighborhoods.

The adjustable rate mortgage is written for a set initial period and with defined conditions. For instance, you may have 5 years at the current interest rate, but then it could increase by several percentage points if rates are much higher. Conversely, if rates fall in that time, you can get a better deal than you have today. That’s the gamble and the reason for taking a stab at predicting the market change. The life of the mortgage could be for 20 or 30 years, but the interest rate you pay is variable.

If you expect to move in a few years, you can enjoy lower monthly payments now and still use the increased value of your home to realize cash out when you sell. This is a popular choice for first time buyers, young families, and fledgling investors.

In spite of the pundits who predicted a ‘housing bubble’ to burst for years, the market continued to rise in almost all markets across the nation. The really peak markets on each coast appreciated at amazing speed, sometimes doubling a home’s value within a year or two. That rampant growth has now slowed. Even in the most robust markets, homes are on the books longer. Multiple bidders are no longer driving the sales price above the listing price. Some builders of new homes and condo conversions are becoming concerned about the inventory they’re holding. People are still buying, and homes are still appreciating, but there has been a decidedly different atmosphere in real estate. The other factor in todays mix is the rising Federal rate.

Now the question is what will happen next? How much risk can I or should I take?

I think this answer lies in your personality. You can go with an ARM and have a lower rate right now with reasonable payments and see what happens when it comes under review. If you are expecting your income to increase through promotions, seniority or new opportunities, this makes a lot of sense. If you have student loans or other expenses which will be paid off, you can envision a much better personal balance sheet. Today’s reality is not forever.

If you are on a different course, you might need to have the stability of that fixed rate. You will always know how much you are going to have as an expense every month for the life of that loan. And if the interest rate drops in a few years, you can refinance then. This is much more appealing to the person who will be keeping their property for a while.

So which personality are you?

By: Carolyn Staggs

According to the National Association of Realtors, home depreciation is affecting homeowners across the nation. As a result, many consumers are nervous that home values may begin to drop before they refinance their adjustable rate mortgage. Millions of homeowners have mortgage loans that are scheduled to recast which will cause interest rates to rise. Borrowers will have rising monthly payments as a result.

The good news for people who are considering refinancing your ARM is that the current market is yielding low rates with affordable payments blessed with interest only monthly payment options. The fixed rate second mortgages are a whole percentage point lower than the prime rate for home equity lines of credit that are reported in the Wall Street Journal.

The bottom line you need to focus on is whether or not the home equity loan offers you monthly savings by consolidating your debt. If you have the ability to lock into a fixed rate mortgage and save a few hundred dollars a month, then it is time to call your loan officer. Ask your loan representative if you can eliminate your revolving credit cards at the same time you refinance your ARM.

How much money would you save by refinancing into fixed rate loan?

As many of borrowers already know, consumer debt is at an all-time high, and if you have credit card bills mounting each month it may be time to consider a 125% second mortgage. This 2nd mortgage requires zero equity, and the loan balances can even exceed the value of your home. FHA mortgages will allow you to subordinate your existing 2nd mortgage if you do not have enough equity to refinance both loans into one mortgage.

- Second Mortgage Loans to 125%
- Home improvement financing
- Debt consolidation for lower Payments

Fixed rate second mortgage loans can convert adjustable rate rate credit card debt into a simple interest installment loan that yields significant monthly savings and additional tax deductibility as well. Homeowners benefit from reduced their numerous credit cards balances when the compounded interest debts convert to simple interest savings. People are saving thousands of dollars each year, when they consolidate their variable interest loans into a fixed rate 2nd mortgage or FHA home loan.

By: Lynda Nelms