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Refinancing a Mortgage

A Guide To Mortgage Equity Loan Options

by Bill Gassett on September 19, 2011 · 1 comment

Mortgage Equity Loan OptionsWhen looking to take money out of an existing home or other Real Estate borrowers often have a decision to make on what is the best method to do so.

There are basically three financing options that are available to home owners. These include a cash out re-finance, home equity loan or a home equity line of credit (HELOC). Determining which of these type of loan options will work best basically comes down to what purpose the money is going to be used for.

Unfortunately being in the Real Estate field, I often come across folks who have over extended themselves and find that they have created undue hardships. Going back ten years ago this was not so much of a problem as Real Estate markets around the country were booming and a home was an investment windfall.  Every few months the value of homes would continue to rise and did so for over a decade. Of course all good things must come to an end eventually and now we are left with property values decreasing in most areas.

When the economy and Real Estate values are soaring it is hard not to look at a home as a giant piggy bank from which you can tap at a moments notice. When times are tough however, you may regret taking your equity for granted by pulling it out of the home.

Below is a guide to help you determine whether borrowing against the equity in your home via a home equity line of credit (HELOC), home equity loan or a cash out refinance makes the most sense.

Home Equity Line of Credit (HELOC)

Home equity lines of credit work much like credit cards do. As a borrower you are given a credit limit up to which you are allowed borrow. Also similar to credit cards is the fact that the loan is open ended and carries an adjustable interest rate. Home equity lines of credit are tied to the prime rate as a basis to lend money.

Typically borrows can expect to pay the prime rate plus 2% as an example. Like credit cards HELOC’S can be closed by lenders at any point in time. Like any other loan it is prudent to shop around for the best rate and terms. Make sure you only borrow what you can afford as this loan is directly tied to your home and if you can not afford to make payments you could potentially lose your home to foreclosure.

The biggest advantage to a home equity line of credit is you can borrower whatever you need, up to whatever amount the lender has set, whenever you need it. The big draw back however is the lender can shut off the line of credit if the value of your home falls, your credit takes a hit or if the lender just decides they don’t want to offer you credit anymore.

Home Equity Loan

Home Equity Line of CreditA home equity loan is a form of a second mortgage against your home. The terms of which can vary greatly from a first mortgage. With a home equity loan you borrow a set sum of money at one time and it is paid back over a certain amount of years and interest rate that can vary greatly.

Often times a home equity loan has a fixed interest rate but also could be variable as well. Like either of the other financing options if you don’t pay it back the lender would have the option to foreclose!

Most of the time a home equity loan option is used for a specific purpose where the cost is known ahead of time. For example paying for the kids college education or buying a new car. What you need to decide is whether you would get more favorable loan terms by going this route or by getting an unsecured loan somewhere else such as at credit union or local lender. Sometimes this decision boils down to how conservative you want to be. You may get a better interest rate by getting a home equity loan but is it worth the risk of having it secured against your home?

Some borrowers would say no. If you happen to lose your job and have an equity loan against the family home for $150,000 this may not put you in a comfortable position. You should also check to see if there are any penalties for paying off the loan balance early. A number of lenders will charge a pre-payment penalty fee if you sell the home.

Cash Out Re-finance

A cash out re-finance is when you pay off your existing loan and get a new loan for the old mortgage balance plus whatever additional amount you need to borrow plus any closing costs. If the cash out refinance interest rate is lower than the existing mortgage rate, this option is probably going to be the best route to take. Most of the time you are going to be able to get a better interest rate with a 1st mortgage than going to the 2nd mortgage option. It is likely cheaper to borrow this way than having the combination of two mortgages. This is especially true when fixed rate mortgages are very low.

Nowadays when getting any type of mortgage it really makes sense to look over your ability to pay it back. The last thing you want to do is find yourself in an uncomfortable financial situation. Carefully studying the above home equity mortgage scenarios to determine which fits your situation best is a good business decision!

Other Mortgage articles worth a look:

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About the author: The above Real Estate information on A guide to mortgage equity loan options was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-435-5356. Bill has helped people move in and out of many Metrowest towns for the last 25+ Years.

Thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!

I service the following towns in Metrowest MA: Hopkinton, Milford, Southboro, Westboro, Ashland, Holliston, Medway, Franklin, Framingham, Grafton, Hopedale, Mendon, Upton, Northbridge, Shrewsbury, Northboro, Bellingham, Uxbridge, Sutton, Worcester, Natick, and Douglas.

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Great Reasons to Refinance a Mortgage

by Bill Gassett on October 26, 2010 · 2 comments

Reducing your interest rate

Great reasons to refinance a mortgage

When interest rates are at record lows it creates an environment that is ripe for refinancing a home mortgage. There is no question that a mortgage on a home is usually one of the largest financial obligations that you will have in your life.

It stands to reason that if you can cut your interest rate you will save a bundle of money of the life of the loan. Besides reducing an interest rate there are a number of other reasons to consider refinancing a mortgage.

Changing your mortgage term

When a home owner refinances most of the time it is because they able to get an attractive interest rate. One of the considerations when rates are really favorable is the ability to also cut the mortgage time substantially for the loan and not have your payments change all that drastically. You could have the term of your mortgage go from 30 years down to 15 or 20 years and in the process not only will you be cutting time off the loan but also decreasing your interest costs. When cutting the term of your mortgage you will also be building equity in the property much faster because more of your payment will be going toward the principal instead of interest.

If you look at a 30 year mortgage it is incredible to see how much money you are actually paying the lender in the early stages of the loan. It is enough to make your head spin. Going to a shorter term mortgage saves an incredible amount of interest!

There is also the possibility you may have started with a 15 year loan and now realize that it is difficult to make the payments every month as well as keep up with the rest of your bills. If this is the case going from a 15 year mortgage to a 30 year mortgage may make financial sense. See getting the best mortgage home loan program for considerations on which loan product may suit your needs best.

Taking out cash

There are times in life where something unexpected may occur and you may really need some money badly. You may not want to cash out of other investments such as stocks or CD’s due to penalties or tax ramifications.  Refinancing a mortgage can sometimes be the a great alternative especially if money is cheap.

A cash out refinance could also make sense if you want to make an improvement on your home but don’t want to take out a home equity loan creating a 2nd mortgage on the property. Maybe you want to purchase a new vehicle and would rather not finance it from another lending source. These are all reasons that make sense for a cash out refinance. Just make sure you don’t blow this money and put yourself into a financial hole.

Mortgage Debt

Changing from an adjustable rate to a fixed rate mortgage

Sometimes when a borrower purchases a home they can’t qualify without going with an adjustable rate mortgage which typically offer lower rates than a longer term mortgage. If you can grab at the chance for additional security of locking in a great long term interest rate why not!

Often times when buying a home the borrower may opt to go with an adjustable rate mortgage if they feel they will not be staying in the same home that long. If circumstances change and you feel you will be staying put going to a fixed rate with long term emotional and financial security may be of great benefit.

Going through a divorce

Divorce of course is something that most people don’t plan for but can become an unfortunate circumstance of ones life. There is always the possibility that one of the spouses will keep the home and the other could be bought out of the property. If this happens to be the case a refinancing is a solution to get the property into one mortgage holders name. The other spouse gets the cash from the refinance.

There is quite a bit to think about when going through a divorce. See divorce and selling Real Estate for a summary of some of the things to consider.

Consolidation of two mortgages

If you read the newspaper or watch the news and are hearing that interest rates have become very attractive one of the things you may want to consider if you have a home equity loan or other 2nd mortgage to refinance into one loan. Not only is it more convenient to get one statement from one lender every month but you will more than likely get a better rate with one lender.

As a Realtor who has been practicing Real Estate for almost twenty five years and being associated with the mortgage industry, I can tell you with certainty that it makes sense to shop around and speak with a few lenders. You need to be careful not to just shop the interest rate but the whole package including the points you will be charged and the closings costs. While one lenders rate may look great on the surface it could be because there are higher fees or points attached. Above all else do your home work!

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About the author: The above Real Estate information on refinancing a mortgage was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-435-5356. Bill has helped people move in and out of many Metrowest towns for the last 24+ Years.

Thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!

I service the following towns in Metrowest MA: Hopkinton, Milford, Southboro, Westboro, Ashland, Holliston, Medway, Franklin, Framingham, Grafton, Hopedale, Mendon, Upton, Northbridge, Shrewsbury, Northboro, Bellingham, Uxbridge, Worcester and Douglas.

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