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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Minimizing Mortgage Refinancing Risks

Mortgage refinancing offers many advantages and potential savings; however, there are a number of risks and expenses that you should keep in mind. If you are refinancing because your existing mortgage has an adjustable interest rate you can minimize your risks by choosing a mortgage with a fixed interest rate; however, anytime you take out a new mortgage you run the risk of overpaying for the new loan. Here are several tips to help you protect yourself from lender abuses when refinancing your mortgage.

The main objective for many homeowners when refinancing is to obtain a loan with a lower mortgage rate and better terms. A lower monthly payment isn’t the objective for every homeowner; some people refinance their mortgages with a higher monthly payment in order to pay down their mortgages more quickly. Regardless of your objective for the new mortgage there are steps you can take to ensure your mortgage broker and lender are not taking advantage of you when refinancing.

refinance mortgage bad credit Minimizing Mortgage Refinancing RisksOne of the risks you encounter when refinancing your mortgage is the markup your broker adds to your interest rate to get a commission from the lender. This markup of your mortgage interest rate is called Yield Spread Premium and according to the Department of Housing and Urban Development is responsible for homeowners in the United States overpaying billions of dollars each year.

Yield Spread Premium can be avoided when refinancing your mortgage. You’ll be required to pay an origination fee for your mortgage broker’s services; a reasonable amount to pay for refinancing your mortgage is one percent of the loan amount. Because you’re paying this fee any commission from the lender is not only completely unnecessary but is taking advantage of you. Talk to potential mortgage brokers before entering an agreement and explain that you understand how Yield Spread Premium works and will not tolerate this unnecessary markup with refinancing.

There are other risks from hidden fees and penalties when refinancing your mortgage. Make sure your existing mortgage does not include a prepayment penalty; lenders frequently include hefty penalties to discourage their borrowers from refinancing the loan. These penalties are unnecessary and can be as high as six months of interest on your original loan balance. If you’re unsure whether or not your existing mortgage includes a prepayment penalty contact your lender prior to applying for a new loan.

You can learn more about minimizing your risks when refinancing and other costly pitfalls to avoid with a free six-part video tutorial. The videos walk you through the entire process of refinancing without paying too much and are broken up into the following sections:

  • Part One: Mortgage Refinancing Introduction
  • Part Two: Refinancing in the Mortgage Marketplace
  • Part Three: How Your Credit Affects Your Mortgage
  • Part Four: Dirty Little Mortgage Secrets You Need to Know
  • Part Five: Refinancing Your Mortgage on the Internet
  • Part Six: Refinancing Your Mortgage Step-by-Step
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