Home Equity Loan vs Refinancing Your Home Mortgage

While every homeowner is unique there are some fundamental considerations to keep in mind when considering refinancing your mortgage or applying for a second mortgage loan. First and foremost it is important to determine what your goals and intentions are. One of the first goals for any homeowner considering refinancing should be to lower your monthly mortgage payment. While this may be the primary goal its not always the number one reason. Debt consolidation and home improvement are the two most common reasons behind refinancing. On the other hand, common reasons for home equity loans or second mortgages range from financing college tuition, paying off outstanding credit lines, or even taking care of emergency expenses. Of course there are a number of other reasons homeowners decide to refinance or take out a second mortgage and you should choose the option that best meets your financial needs.

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When to Refinance

Before refinancing you should always check the market for current interest rates. An effective refinance rate generally means lowering your current mortgage rate by at least one percent. Another reason for refinancing is improvement in your credit rating. If you had bad credit when you originally purchased your house but have managed to improve your score then you may be able to refinance at a lower interest rate even if market rates haven’t changed. Finally if you have seen a considerable raise in the value of your home then it might be time to refinance. If this is your situation then you may be able to take cash out on the increased value of your home.

Benefits of Refinancing

There are numerous benefits of refinancing. The most common include being able to pay off other loans or credit cards that have higher interest rates, increasing your cash flow, or simply shortening your loan term. Its also refreshing to hear that most mortgage interest is tax deductible. You may want to check out IRS rules to see if you are eligible.

When to Choose a Home Equity Loan

Before taking out a home equity loan you should determine the current market value of your property. When you take out a second mortgage or home equity loan you are taking a loan out against the value of your home or in other words a loan in which you use the equity in your home as collateral. There are many mortgage calculators available to determine before hand what type of loan you can expect to receive. The basic calculation involves subtracting your unpaid mortgage balance from you property’s current market value.

Consider this example. If your home is worth $300,000 according to up-to-date market estimates and the balance on your mortgage is $225,000, then you have an additional $75,000 available as a home equity loan. You could potentially take out a home equity loan and use it to finance home improvements, college tuition, or other outstanding debts. The interest on home equity loans is often tax-deductible and could be a good choice depending on your unique situation.

Home Equity Loan vs Home Equity Line of Credit

There are two types of second mortgage loans, a traditional second mortgage loan or home equity loan and a home equity line of credit or HELOC.

The main difference between these two types of loans is the way you are able to access the line of credit. A home equity line of credit (HELOC) has an open-ended line of credit or a revolving line of credit similar to a credit card. You can borrow any amount whenever you need to as long as that amount does not go over your credit limit. Also, you only have to pay on the amount you borrowed, not on the whole amount available. This loan is practical for dealing with unexpected expenses and is typically tax deductible.

A second mortgage or closed-end home equity loan is different than a HELOC in that the loan is usually for a fixed amount and for a set amount of time. These are similar to first mortgages and are practical for putting towards home improvement expenses, college tuition financing, or to pay off other debts.

In either case it is important to remember that you are borrowing against the equity of your home. With your home as collateral you risk foreclosure if you cannot repay the loan, meet its requirements or find other means of refinancing. With interest rates at historic lows and with the opportunity of using interest as a deductible, HELOC loans and second mortgage loans have become more popular than ever. Now is a good time for refinancing but make sure you check all your available resources so you can choose the best mortgage loan for you.