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Home Equity Loan – When Does Refinancing Make Sense?
By: Charles Essmeier
For 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.
About the Author:
©Copyright 2005 by Retro Marketing. Charles Essmeier is the owner of Retro
Marketing, a firm devoted to informational Websites, including http://www.End-Your-Debt.com,
a Website devoted to debt consolidation information and http://www.HomeEquityHelp.net
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a site devoted to information on home equity loans.
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