Refinancing Home Equity Loan

In a money crunch, a refinancing home equity loan could free up some much needed cash to pay off bills or meet emergency financial needs. The amount of equity is determined by appraising the current market value of property, or the price the house would bring if sold today, minus the remaining mortgage balance. In essence, if a seller sold at a profit, the bank would take its share of the asking price, which the seller currently owes on the property; and the seller would pocket the profit. That potential net profit is home equity. Homeowners borrow against the interest in their house, which is used as collateral. A refinancing home equity loan is a second mortgage which replaces the first note with a new monthly payment, ideally at a lower interest rate and with more manageable terms. Many homeowners refinance when rates go down in order to save money on mortgage payments. Borrowing against home equity is also a good way to get extra cash to pay off debt. Owners may want to consolidate and clean up several accounts in order to maximize savings or put money back into the family budget.

Borrowers may choose a refinancing home equity loan which pays out a lump sum at a fixed interest rate, or as a line of credit; and there are advantages to both. With a lump sum, also called a closed end home equity loan, borrowers receive a one-time payment based on the amount of equity, which is usually repaid within 15 to 20 years. For families with several big-ticket financial obligations, a lump sum can go a long way. Parents can finance the kids' college education, pay off car loans, or plan for retirement. A large one-time windfall can afford financial security. A great idea would be to take some cash and invest it into several high-yield short term vehicles. Certificates of deposit, or CDs, money market accounts, stocks and bonds, or liquid assets such as gold and other precious metals, will only accrue interest and increase in value. Obtaining a refinancing home equity loan could be the answer for an uncertain economic future. Instead of relying totally on Social Security to fund retirement, smart homeowners can sock a substantial sum of money away for the golden years, purchase mutual funds, or set up a trust for dependent children or grandchildren.

An open end loan acts as a revolving line of credit; and when a need arises, money is available to be withdrawn or borrowed in smaller increments. Loans are limited up to the total amount of equity over a period of time up to 30 years, but at fluctuating interest rates based on the prime rate, plus margin. Borrowers agree to a minimum monthly note, which may include interest-only payments to keep the line of credit open. The advantages to having a refinancing home equity loan with an open ended line of credit is easy access to funds as needs change and lower interest-only monthly payments. A revolving line of credit is like having a rich uncle who doesn't mind loaning money periodically when you run a little short.

Repaying a refinancing home equity loan should not have to hurt. If taking out a line of credit causes more money woes, then it would be best to forego the temptation. "The blessings of the Lord, it maketh rich, and He addeth no sorrow with it" (Proverbs 10:22). For some consumers, a disadvantage to revolving accounts is easy access to cash. The temptation to come to the well too often could result in a source of water that one day runs dry. Unless consumers exercise discipline and restraint, ready access to cash could cause indebtedness overnight. Borrowers should also watch out for fluctuating interest rates. Some lenders promise the moon, but only deliver star dust. Consumers should not let the dream of instant cash at high interest rates, which are subject to change with economic winds, distort sound financial planning. A second house note with an adjustable rate mortgage which allows the lender to decrease or increase rates at will is risky. Borrowers should make sure to clarify all terms with lenders before leaping headlong into new arrangements.

Before jumping into a second mortgage, borrowers should consider the consequences from every possible angle. The decision to borrow a refinancing home equity loan should be based on: (1) How much the property appraises for on the current market; (2) the amount remaining on the first mortgage; (3) a comparison of interest rates for the first and proposed second notes; and (4) the amount of time in which first and second notes have to be repaid. If the property's appraisal is less than the balance owed on the first mortgage, forget about borrowing equity, because there is none! If there are only fifteen years left on the first note and payments are not super high, there may be no reason to incur additional debt when owners are so close to having a clear deed. And if interest rates for a second mortgage are three to five percentage points less the current payment, the difference may not be significant enough to warrant getting a refinancing home equity loan. On the other hand, if the interest rate for a second note is eight to ten percentage points less, then owners may need to take a trip to the bank. Lastly, owners should carefully examine terms for both options. If the first note is for thirty years, and the second is for fifteen, it makes perfect sense to use the secondary financing to pay off a longer term obligation, only if the new payments are smaller and more manageable.

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