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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You can learn more about your cash-out mortgage refinancing and HELOC options, including strategies for avoiding unnecessary fees and markup by checking out my free Underground Mortgage Videos.

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Mortgage Discount Point Fee

mortgage payment Mortgage Discount Point FeeIf you’re in the process of taking out a new mortgage to purchase your home or refinance an existing home loan you’re likely to encounter points before it’s done. Is it necessary or even beneficial to pay discount points on your next mortgage loan? Are mortgage points a bait and switch scam used to trick homeowners into overpriced mortgage loans? Here are several tips to help you avoid paying too much for your next home mortgage loan.

Discount Points Definition

Mortgage points come in two flavors. There are the discount points you can pay in order to buy down your mortgage rate and the origination points you pay the person arranging your home loan. They are very different fees and it’s important to understand how they work. One point, whether it discount or origination, is a fee that you’ll pay at closing and equals one percent of your mortgage loan amount. In the case of discount points you’re paying this fee in exchange for a lower mortgage rate. This is a legitimate fee that is often abused by dishonest advertisers trying to make their rates appear much lower than they really are. Points don’t always come in full percentages; you could pay less than one percent or more a point.

Suppose for instance you were going to pay one discount point to lower your mortgage rate from 6.0% to 5.75%. On a $250,000 mortgage one discount point would be $2,500 that you would pay at closing in exchange for this lower mortgage rate. The only situation where paying discount points make sense is if you plan on keeping your home for the long term. Even then, as low as mortgage rates are in today’s market the amount of time it will take you to recoup the expense of paying points may outweigh the benefit a slightly lower mortgage rate.

You can figure this out for yourself by spending a few minutes with a simple mortgage calculator. In the previous example your mortgage payment at 6.0% on a $250,000, 30 year fixed rate mortgage would be $1,498 per month. The same loan with a mortgage rate of 5.75% has a monthly payment of $1,458 per month. That’s a savings of $40 per month meaning it will take you 63 months, that’s just over five years to recoup your expenses before you realize any savings. Is it worth it? What happens if you refinance or sell your home before the five years are up? Your $2,500 is down the drain…

Are Mortgage Points Tax Deductable?

Because mortgage discount points are a form of prepaid interest, the points you pay at closing could be a tax deduction. Be careful when shopping for mortgage that your mortgage broker isn’t staring out with an inflated mortgage rate. If you’re a victim of this type of scam, you’re not paying discount points. Real discount points are paid to the lender, not the originator.

Other mortgage scams involving discount points come from companies advertising mortgage rates that seem too good to be true. If you come across one of these offers check the fine print and you’ll find that “x amount” of discount points are required at closing to qualify. Always ask if paying discount points are required to qualify for the mortgage rate advertised.

What About Mortgage Origination Points?

Origination points are a fee paid to the person arranging your home loan. This “loan originator” could be a mortgage broker, company, or banker. Like discount points this is a fee you’ll pay at closing and one point equals one percent of your loan amount. How much is a reasonable fee to pay for mortgage origination? One percent is reasonable, provided the person arranging your home loan has not also marked up your mortgage rate to get a commission from the lender.

Many originators use a hidden commission known as Yield Spread Premium to boost their profits at your expense, often without telling or fully explaining what they’re doing. It’s not uncommon for shady mortgage brokers to charge you as much as two or three percent for loan origination in addition to inflating your mortgage rate for a bonus from the lender. Keep in mind that any markup of your mortgage rate by the broker drives up your monthly payment unnecessarily. Want to avoid overpaying for your next mortgage loan? Learn how to recognize and avoid the markup of your interest rate for Yield Spread Premium.

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You can learn more about paying less for your next home loan by checking out my free Underground Mortgage Videos.

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