Home Equity Loan Refinancing - A Guide

The current housing market has brought about an interest rate range that is very, very low. Naturally, many homeowners are tempted to refinance their mortgages to take advantage of this phenomenon. But, all mortgages are not created equal and not everyone's financial situation is the same. Refinancing, despite the low interest rates, is not always the right choice. While reducing and consolidating debt is usually a good reason, refinancing for the purpose of buying luxury items (i.e. cars, boats, vacations) can actually lead to hardship (and potentially a foreclosure).

When faced with the option of refinancing, do your homework to find out what the best deal would be for you. The basic rule-of-thumb in the "refi" business is that it only makes sense if you can lower your interest charge by 2 or more percentage points. Another thing to look at is the closing costs versus the life of the credit. You must determine how long it will take to break even (paying off the closing costs) and ask yourself if you really plan to stay in your house that long. For most people, it takes roughly 3 years to break even.

The type of mortgage that you currently have should also factor into the equation. If your mortgage has an adjustable rate (or ARM), you may want to switch to a fixed-rate for the certainty of knowing what the monthly payment will be. Or, you may want to change to another ARM that offers protective features such as a payment cap or a better starting price.

Another thing to consider is the total length of the loan. Some find a adjustment to shorter term credit for the purpose of building equity is a worthwhile venture. Others just wish to use their equity to increase the value of their property (home improvements) or to invest in a college education.

Before researching a potential refinance, it is important to read the fine print on your current mortgage. Some mortgages assess penalties and fees for early pay-off. If the penalties exceed the overall savings, then it is not advisable.

If you have decided that refinancing is right for you, then you need to thoroughly investigate all your options to determine the financing that is going to be the best for you. Besides knowing what the annual-percentage-rate (APR) and the type (fixed or variable) will be, there are other factors to take into consideration like the term of the mortgage (how long it will take for you to pay it off). Short term mortgages usually have a lower rate but have higher monthly payments.

Points, or origination fees (also known as discount fees), are fees that you pay to a lender or broker when you close the deal. One point equals one percent of the loan's value. There are "no-cost" or "zero points" finance but they tend to be more expensive if the lender charges a higher threshold. It is best to determine if the savings from a lowered-rate in a refinance can justify paying these points.

There are two types of refinancing that a home owner can obtain: cash out and a equity loan. The cash out is where you take out a new mortgage for an amount that exceeds the balance on your current loan. This will cause you to get cash back at closing. An equity loan is a second mortgage on the equity of your home.

Speed, cost, rate, and term should all be factored in when determining which type of restructuring is right for you. Equity loans are faster, have fewer fees, but usually have a higher APR. They are also shorter in term and are more flexible. By considering all your options, you should find the arrangement that best suits you.