Refinancing Options: Taking Equity Out of Home

In reviewing whether or not home mortgage refinancing is the right course for you, you must take the time to closely consider all of your options. In this article, necessary information regarding home mortgage refinancing and taking equity out of your home is provided for your consideration.

Alternatives Regarding Equity

There are several ways to take equity out of a house. One way is the home equity loan. Often called a second mortgage, this is a loan which allows you to borrow against the equity in your home. Another is the home equity line of credit, which is a revolving line of credit that works like a credit card. The interest on both of these loans is tax deductible.

Cash Out Refinancing

While the home equity loans and lines of credit may be the better way to use equity in your home for other purposes, they may not work for everyone. If you have decided that they aren’t right for you, you are probably looking at a cash-out refinancing. There are some things to consider.

Make Sure Home Mortgage Refinancing Really is Right for You

First, make sure you are going to walk out of the closing with an advantageous position. There should be a benefit in it for you. If the new loan would make your increased monthly payments too high to benefit in the long run, reconsider the home equity loan and line of credit—and don’t forget to subtract the loan fees against your savings as well.

Remember Your Future Payment Obligations

Remember that when you refinance, you are starting you payments all over again. Think back to your very first house payment—it was mostly interest, and as you paid down your principal little by little that ratio changed and you began paying more principal. You are going to have another “first payment” problem all over again. One advantage to this will be the increase in your income tax deduction, but if you also get lower payments this may not help—besides, it will probably not be an appreciable change.

Be Sure You Understand All Associated Fees

If you don’t have a low cost or no cost loan application, you will be paying for other fees. This could constitute a large outlay of cash up front, before you even have approval on the loan. You will likely pay for points, surveys and appraisals, an application fee, title search and insurance, and possibly even legal fees that the loan company incurs when it has lawyers look over final papers.

Analyze the Interest Rate Over the Life of the Loan

Always look at your total interest over the life of the loan to help you determine if a cash out refinanced home loan will be to your benefit. If you have had spotty credit recently, chances are you won’t have the low or no cost option, and your interest rate will cancel any advantage you had by getting the cash out of your house.