Cash-Out Mortgage Refinancing or Home Equity Line of Credit?

If you’re thinking about borrowing against equity in your home there are several options for cashing-out. Mortgage Refinancing will get you a new home loan at today’s low refinance rates; however, you’ll be required to pay significant fees at closing. Lenders are bringing back the Home Equity Line of Credit (HELOC) after suspending these loans after the housing meltdown. Here are several tips to help you decide if mortgage refinancing or a Home Equity Line of Credit is right for you.

The Home Equity Line of Credit Returns

It’s been a couple of years since the Home Equity Line of Credit has been available as a means of cashing out equity from your home. Part of the problem with these loans is that the majority of homeowners that had them found themselves under water following the crash of the housing market. It’s still difficult to qualify for a HELOC because lenders have hefty requirements to qualify, unlike in the past where many lenders actually encouraged you to treat your home as a piggy bank.

Cash-Out Mortgage Refinancing Has Advantages

There are a few situations where cash-out mortgage refinancing is a smart financial move. If you’re leery about treating your home as a piggy bank you’re in good company; however, there are justifiable reasons for needing the cash, lifestyle purchases notwithstanding. Refinance rates are at 60-year lows and the interest you’ll pay borrowing against your home is fully tax-deductible.

Cash-out mortgage refinancing rates are typically lower than HELOC rates meaning your payments will also be lower. Currently refinance mortgage rates for 15 and 30 year fixed-rate home loans are below four percent. HELOC interest rates are currently right around 4.6% while other home equity loans are averaging six percent. Mortgage refinancing has another advantage in that you’re getting a lower monthly payment allowing you to recoup your out-of-pocket expenses.

Many analysts believe refinance mortgage rates can only go up from present levels meaning if you don’t take advantage now you might never see rates this low again. Cash-out mortgage refinancing is an affordable option from today’s best mortgage lenders like Amerisave and Quicken Mortgage. HELOCs have several disadvantages as most come with variable interest rates meaning your payments will change over time.

These loans typically start with a lower teaser rate that resets to a higher rate taking your payment along for the ride. It goes without saying; however, with a HELOC you’ll have a second payment to make in addition to your regular mortgage payment. This second payment could create challenges for homeowners with already limited budgets.

Another problem with the Home Equity Line of Credit is that technically it is a 2nd mortgage, meaning there is a second lien on your home.

This is a risky proposition for lenders because in the event of foreclosure they won’t see a dime until the primary mortgage is paid. With home values still declining in many areas of the country lenders would be left without sufficient equity to cover the primary mortgage, making qualifying for these loans difficult even with stellar credit.

The requirements to qualify for a HELOC are a loan-to-value ratio of 85 percent in most markets. If you’re turned down for the Home Equity Line of Credit most lenders would still consider you for cash-out mortgage refinancing, which could be a better option.

HELOC Advantages

The main advantage of a Home Equity Line of Credit over cash-out mortgage refinancing is the fee will be much lower. HELOCs are also helpful if you’re not sure how much cash you need to borrow against your home. If you’re approved for a $15,000 line of credit but only spend $7,000, you’re only going to be charged interest on what you’ve borrowed.

The ease of access to your equity could be a disadvantage for many homeowners lacking the financial discipline not to overspend. The housing market has not fully recovered making HELOC loans out of reach of most homeowners; however, if you qualify there are situations where this type of home equity loan makes sense. For everyone else cash-out mortgage refinancing is a good alternative, providing you’re able to recoup your expenses.

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Cash In Mortgage Refinancing Revisited

There’s a lot of talk in the market place about cash-in mortgage refinance loans. If you’re unfamiliar with this option and are struggling to refinance because you’re underwater in your home loan, cash-in refinancing could be your answer. This isn’t for everyone as it can be quite expensive depending how underwater you are in your mortgage loan. Here are some tips before you refi to help you decide if the cash-in refinance option is right for you.

Cash In Mortgage Refinance Definition

No doubt you’re already familiar with cash-out mortgage refinancing, which is simply borrowing against the equity in your home at the same time you refinance. Cash-in refinancing works in a similar way expect you’re paying down a portion of your principle balance as part of the transaction. This works well for homeowners who are underwater in their home loans hand cannot qualify due to unfavorable loan-to-value ratios.

Should You Pay Out Just to Qualify?

Declining home values and our terrible economy have contributed to record numbers of homeowners being underwater in their mortgage loans. (Underwater means you owe the bank more than your home is worth and have no equity) Lenders don’t like taking on properties with negative equity because the risk outweighs any gains from carrying the home loan. Homeowners who are underwater are much more likely to walk away from a property than those who share ownership in their home.

The decision to go forward with this type of mortgage refinance depends on how much you’ll have to pay to qualify, how much the closing costs and loan origination fees will run you, and how long it will take you to recoup these expenses with a lower payment amount. If your budget is in a pinch and you have access the cash to pay down your balance to a favorable loan-to-value ratio, refinancing to a lower monthly payment could give you some much-needed breathing room in your budget.

Using Retirement Accounts to Qualify for Mortgage Refinancing

Some homeowners are raiding their 401k and other retirement accounts to get their hands of the cash to pay down their home loan balances. I’m not here to give you long-term financial advice; however, if you’re in a bad financial situation and are emotionally vested in your home, cracking the piggy bank on your 401k could offer you the means to get out from under negative equity in your home. The downside is your retirement plan will suffer a setback.

Once you’ve decided to go forward with your cash-in mortgage refinance you can cut your out-of-pocket expenses by minimizing your loan origination fees and closing costs. This will allow you to recoup your expenses more quickly and benefit from your new, lower payment amount.

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