Refinancing your home equity mortgage allows you to get a better rate or terms. It also provides you with the convenience of replacing your current mortgage loan with a new one so that you can pull out your money any time you want. Most people refinance their mortgage to get lower interest rates than their current mortgage loan - it wouldn't make sense to refinance a mortgage for a higher interest rate. Refinancing helps reduce monthly payments spent on mortgage interest.
Most people make the mistake of waiting months or years until the interest rate is 2% lower than their current mortgage to refinance their loan. The real test of refinancing mortgages is calculating how long it will take for you to recover the closing cost using the new lower payment and compare it to how long you plan on living in the house. To do this, get the monthly payment of the refinanced loan and divide its difference with the closing costs of your new transaction. This is the number of months it will take for you to recover the closing costs. If you decide to wait years until the interest rates drop, you will be losing interest rate savings because you didn't refinance your mortgage earlier, and you will be risking the chance that interest rates will rise. The trick to refinancing your home equity mortgage is saving on interest while keeping a close eye on closing costs, while also danticipating how many years you'll be living in the house.
Of course, you can pay more each month instead of refinancing your loan; for many buyers, it's more automatic and convenient to do so. Each payment goes more to principal than to the interest. For instance, some couples refinance their loan from a 30-year mortgage to a 15-year mortgage so that by the time their children go to college, they will be mortgage-free.
Here are three ways to refinance home equity loans:
- Home equity loan. This is also called a second mortgage. This loan is the one you take on top of your current loan. This is also an option people with two homes take. Home equity loans usually have a fixed monthly rate that must be repaid over a period of time. The home equity rate from this loan is typically used to pay for the second home, but it is the primary home that secures the loan.
- Home equity line of credit. A home equity line of credit works like a credit card in that the credit limit, or the maximum amount you can borrow, is taken from a percentage of your primary home's appraised value.
- Cash-out refinance. This option allows you to take cash out of your home based on the equity you built. Your house is refinanced for more than what you owe, then the extra money goes towards your needs. Cash out refinancing should cost the same as your interest rate and other loan related costs, but make sure you don't take out too much money. Cash out refinance is only a good option if it offers lower interest rates than your primary home loan.