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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Home Equity Loans 101

home equity Home Equity Loans 101Home equity loans are becoming a popular means of borrowing against the value of your home. There are actually two types of equity loans available called the “open end” and the “closed end” loans. An equity loan is one in which you take the equity in your home and use it for collateral so you can receive a loan.

Before you can qualify for a home equity loan you will most likely be required to have very good or excellent credit. If you meet these qualifications, this is how a home equity loan works.

When you apply for the loan there is a process that you must follow. You will start by filling out an application form. The loan representative will ask you to verify the information on your application and they will ask for any additional information that is needed. At this time they will also provide you with vital information such as the terms of the loan and the interest rates.

The details that you provided to the loan representative will be confirmed and then you will need to download an authorization form that will start the loan approval process. You will need to sign the application and fax it back.

The documents that you will need to provide to receive a home equity loan are listed below:

• W-2 Forms
• Proof of Income
• Proof of Homeowners Insurance
• Financial Analysis Worksheet
• Mortgage Statements
• Appraisal Forms for the Equity
• Bank Statements

Have this information ready when you first apply for the loan and it will save you a lot of time. Once all the information has been submitted it will be processed and then you will be asked to schedule a document signing. Make sure you understand everything in the documents before you sign so you don’t end up with any surprises later. The documents will be verified and validated and then sent on to the funding department. At this point the check will be issued and the loan is complete.

A home equity loan is a great way to receive the extra money you need to pay for any unexpected expenses that come along. It can be used for remodeling your home, medical bills, school expenses and so forth.

Mortgage Refinancing vs. Second Mortgage Loan

home mortgage points Mortgage Refinancing vs. Second Mortgage LoanIf you are homeowner contemplating a second mortgage loan or mortgage refinancing and don’t know which is the better option, here are several tips to help you make an informed decision. Both options have advantages and disadvantages depending on your situation. Mortgage rates are at very low levels and there are still great mortgage deals available if you can put in the time doing your homework and research mortgage offers.

What is Mortgage Refinancing?

Refinancing is simply the process of taking out a new mortgage to pay off your existing loan. When refinancing your existing loan you’ll have the option of borrowing against the equity you have in your home and using this cash for any reason. Mortgage refinancing has the advantage of one loan payment regardless of how much cash you take back from your home’s equity.

Second Mortgages Are Generally More Expensive

Whenever you take out a second loan on your home that lender assumes more risk because there are multiple loans secured by your home. This additional risk is passed on to you in the form of a higher mortgage rate. Higher mortgage rates mean higher monthly payments and with a second mortgage or home equity loan you will have to juggle your first mortgage payment as well.

There are Fees to Consider

No matter which option you choose there are fees that you’ll be required to pay. These fees include application fees, origination fees, markup of your interest rate, and closing costs. Because you are borrowing against the equity in your home you may never recoup these expenses so it is important to shop around and minimize your out-of-pocket costs.

So far I’ve talked about the disadvantages of second mortgage loans and home equity lines of credit. The main disadvantage is that these loans are expensive; however, there are some advantages to this type of financing. Home equity lines are generally more convenient and very easy to set up. Home equity lines of credit typically come with a debt card which allows instant access to your money.

Electronic access to the equity in your home can be dangerous for many homeowners who find that they are spending too much because of this ease of access. If you find yourself using this debit card to purchase groceries it is a sure sign that you have a problem with this type of loan and should cut up the card.

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