Mortgage Refinance Guide

Refinancing with cash back can be an excellent way to borrow against your home’s equity. In today’s economy a second mortgage could be a better choice. Here are some of the advantages of taking out a second mortgage on your home.

Borrow against Your Equity

If your current mortgage already has a low interest rate a second mortgage will be a better option than refinancing to a higher interest rate. Second mortgages usually come with fewer fees than refinancing and can be paid back sooner.

Refinancing is expensive, especially when interest rates are rising. The costs involved in refinancing your mortgage require you to stay in your home for at least two years to recoup those expenses. The advantage of a second mortgage is that you will not have to pay these fees or worry about recouping your losses.

Home Equity Line of Credit

If you use a home equity line of credit you will have access to your equity over a period of several years. This money is available to you by writing a check, using a debit card, or by requesting an electronic deposit. The advantage of a line of credit is that your finance charges are based only on the amount you spend.

Easier Approval

You may find it easier to qualify for a second mortgage then to refinance your current mortgage. If you have less than desirable credit consider a second mortgage for your home equity over refinancing and taking cash back.

Common Homeowner Mistakes

Second mortgage loans are not for every homeowner. Carefully plan your budget so you do not become overextended and unable to make your payments. Your second mortgage is secured by your home just like your primary mortgage; if you fall behind on the payments your lenders could foreclose and take your home.

Borrowing too much equity could result in your lenders requiring you to purchase Private Mortgage Insurance (PMI). Private Mortgage Insurance can add hundreds of dollars to your monthly payment and does nothing for the homeowner; PMI only protects the lender from loss due to foreclosure. You can learn more about your mortgage options, including how to avoid common mistakes, by registering for our free mortgage guidebook: “Five Things You Need to Know before Refinancing Your Mortgage.”

If you are looking for a practical method to eliminate your high interest debts such as credit cards and student loans, a home equity line could be the solution you are looking for. Debt consolidation using the equity in your home is a fast and easy way of eliminating high interest debt and saving money. Here is what you need to know about home equity loans.

Many homeowners have seen astonishing appreciation in the value of their homes over the past several years. This appreciation results in the appraised value of your home going up from when you purchased the home. Your equity is the difference between the balance owed on your mortgage and the appraised value of your home. For example, if your home appraised at $150,000 and you owe $50,000 on your mortgage, the equity you have in your home is $100,000.

When you take out a home equity loan you are borrowing against this value in your home. A home equity loan is a 2nd mortgage secured by your home; if you default on this loan the lender can foreclose and sell your home to repay the debt.

Consolidating Debt with Home Equity

Using a home equity loan to consolidate high interest debts can be the first step to becoming debt-free. Consumer debts such as credit cards, student loans, and car loans carry high interest rates and other fees. When you consolidate this debt with a home equity loan you will only have to make one payment each month.

Consolidating debt does not eliminate debt; it simply makes it easier to pay and reduces interest paid on the loan; this allows you to pay off your debts faster.

Advantages and Disadvantages

The advantage of consolidating your high interest debt with a home equity loan is that you can pay off the balances and close the accounts right away. Using home equity can reduce your outgoing cash flow by as much as 40 percent each month. The downside of using a home equity loan is the fact that this loan is secured by your home; falling behind on the payments could have disastrous consequences. To learn more about home equity loans register for our free mortgage guidebook: “Five Things You Need to Know before Refinancing Your Mortgage.”

This could be the headline if President Bush gets his way regarding home mortgage interest next week.

Housing prices stand to lose 15 to 20 percent of value if the President’s tax reform panel’s recommendations are passed into law. One industry expert estimated the average homeowner would lose from $25,000 to $30,000 in equity because of these recommendations.

The housing market drives the economy in the United States; to even consider cutting the tax benefits of owning a home could endanger home values. This change the President is proposing would harm middle class families foremost. According to government statistics over 50% percent of American families that claim mortgage interest tax deductions have an annual income from $50,000 and $200,000.

The final recommendation of the advisor panel will be made later next week. They are expected to recommend to the President elimination of the tax deduction. This deduction will be replaced with a meager tax credit. In addition, they will recommend elimination of deductions or credits for second homes, repealing deductions for property taxes, state and municipal taxes, and reducing the exclusion offered when you sell your home.

The recommendations are outrageous. This is quietly happening backstage in the media to the war in Iraq and the Hurricane disasters. The best thing you can do to protect the equity in your home and safeguard your family’s income is to contact your representatives in Congress and let them know how you feel about the President’s plan to rob your home of equity.

If you need to take out a loan, home equity lines are an easy source for credit. In the beginning a home equity line can provide lots of cash at fairly low rates and even give you tax deductions you can’t get with other loans.

On the other hand, a home equity line of credit will use your home as collateral. This could place your home at risk if you are unable to keep up on your monthly payments. Some loans require a large balloon payment when the loan term ends that may force you to borrow more in order to pay the loan. When this happens you may not qualify for refinancing which would force the sale of your home. In a soft market where you cannot sell your home you could lose everything to foreclosure. When you do decide to sell your home many lenders require that you pay off the home equity line at that time. Another risk to consider is easy access to your money these loans offer; you may borrow more money from your home equity than you would otherwise, doing this forfeits the equity you have built up in your home.

Keep in mind there may be other options to get the money you need. One option is a second mortgage installment loan. These loans add additional mortgage to your home; however, second mortgages pay you a lump some rather than a series of cash advances. Home equity lines typically have you write checks on a line of credit. Another advantage to a second mortgage is they typically offer fixed interest rates and fixed monthly payment amounts. There may also be additonal avenues of borrowing that do not require your home for collateral. Credit cards and unsecured lines of credit may let you write checks like a home equity line. There are also other types of loans for specific purposes: student loans and car loans for example.

To learn more sign up for our free guide: “Five Things You Need to Know Before Refinancing Your Mortgage.”

One option to consider when refinancing your mortgage is to refinance for more than the remaining balance of your original mortgage; this is tapping into your home equity, or cashing out equity, so to speak. With low interest rates, you can do so without increasing your monthly mortgage payment. For example, at 6.4 percent, the monthly installment on a $250,000, 30 Year fixed interest rate loan is $1,546.75; however at 5.4 percent, that same mortgage payment lets you take out nearly $20,000 in equity more.

The way to put this cash to use is paying off higher rate loans you may have, like credit cards. Suppose you have a $15,000 car loan at 10 percent interest, also paying the minimum payments on $10,000 worth of credit card debt at 17 percent interest. Your payments every month for that debt would be over $680. Suppose then that you refinance your mortgage loan, taking out $25,000 in equity to pay your car and credit card debt. This would result in a savings of $505 per month!

You don’t have to use all of the cash for paying off bills. It is of course, your money. When Tina Davis refinanced her adjustable rate mortgage (ARM) for a fixed interest rate loan last summer, she increased her mortgage load $37,000, from $103,000 to $140,000. She used the proceeds to pay her refinancing expenses and $17,000 of the equity to pay off an 8% home equity loan, for which she had been paying $250 every month. She spent the remaining $14,000 to install hardwood floors and re-stucco her home; all for just another $19 a month on top of her monthly mortgage payment.

To learn more about refinancing your mortgage sign up for our free ezine: Five Things You Need to Know Before Refinancing Your Mortgage.