Home equity loan and refinancing are two excellent ways that can help you manage your finances. However, it may prove difficult to choose one from the other and should depend on what your financial goals are. You can opt for the lower payment schemes of cash-out refinancing, or you can choose the great tax benefits offered by a home equity loan. The choice, however, does not prove to be as simple as this. Here is a comparison of these two types of loans to help you see which one is right for you.

Cash-Out Refinance Loan

Cash-out refinance simply means that you are refinancing your existing mortgage in order to lower your monthly payment and/or your current interest rate, and get some additional cash for other pressing reasons such as for home improvement, renovation, and the likes. If you are lucky to choose the right timing, you may be able to get all these with cash-out refinancing. Say, your home is valued at $300,000 and your existing mortgage balance is $200,000, your home equity remains at $100,000. You are free to borrow the remaining equity as you deem necessary.

Home Equity Loan

Home equity loans are usually provided in two kinds: the home equity line of credit and the home equity installment loan. A home equity line of credit line means that you are borrowing against the value of your home; your home is your collateral to the credit. Home equity plans are usually set at a fixed time; say 10 years but with variable loan rates. Your interest rate and the annual percentage rate of your mortgage can move up and down depending on the market trends. During the specified time, you are free to obtain the cash when you need it, and pay only for what you happen to spend. Some mortgages are offered with payment of full outstanding balance, while others allow repayment over a fixed time.

On the other hand, an installment loan is a loan that has a fixed rate that stays the same all throughout the rest of your home equity loan terms. Also called the closed end home equity loan, you amortize your loan for periods lasting up to about 15 years. In this kind of home equity loan, you usually receive a lump sum at closing depending on your home value, and you can not borrow further afterwards.

Which is better?

Remember that interest rates do not usually behave normally, much as you want them to. When this happens, home equity loans may actually prove cheaper than refinancing, although they are potentially riskier. Choosing what is better between the two should depend on individual circumstances. For example, if you plan to pay off your mortgage and do not need as much money, you can go for a home equity loan to get lower rates and shorter terms. On the other side of the fence, with cash-out refinancing, you can get all your money up front and simply pay off interest and principal on a lowered monthly basis as agreed upon, with no frills. Weigh carefully based on what your financial objectives are and choose one which you think will give you a fairer deal.




By: Alan Lim

For many people there comes a time when it makes sense to refinance their home mortgage. There can be any number of reasons to do this but for most people the primary goal is to lower their interest rate and their monthly payment. Everybody’s situation is different so the reasons for doing a refinance can vary from person to person.

When you do a home mortgage loan refinance you are basically taking out a new loan and using it to pay off an existing loan. You of course do not want to refinance if your new loan will cost your more in interest and monthly payments so it pays to research any new loan carefully.

As you delve further into the realm of refinancing a home you will undoubtedly run into terms that you may not be familiar with. These may include the following:

Term Length – This is the amount of time you have to pay back the loan. The majority of loans go for either 15 or 30 years. The longer the term the more interest you will pay during that term.

Fixed Rate Mortgage Loan – This is a mortgage in which the rate is set at closing and does not change for the life of the loan.

Adjustable Rate Mortgage (ARM) – This is a mortgage with an adjustable rate. That means the rate can move up or down depending on what the prime rate or treasury index it is tied to is doing. This type of loan usually starts out at a low rate that makes it a great deal, but consumers need to be careful if and when the interest rate goes up, increasing the monthly payment.

Annual Percentage Rate (APR) – This number represents all the costs associated with a mortgage shown as an interest rate. It can vary among different lenders because they all calculate it a little differently. If you are comparing rate use the Good Faith Estimate that all lenders are required to provide.

Good Faith Estimate (GFE) – This is a document that all mortgage lenders are required by law to provide to all applicants. It will give a full account of all the estimated costs for a loan from a particular lender. You should have this in hand no longer then 3 days after filling out a loan application.

Loan to Value Ratio (LTV) – This ratio is a percentage that shows what percent you are borrowing against the appraised value of your home. Keeping this ratio below 80% is what most lenders are looking for. If your LTV is higher then 80% you will probably be required to purchase mortgage insurance in order to refinance.

Points (Discount & Origination) – There are two types of points that you can pay. Discount points are paid up front at the closing and are used to bring down the interest rate. Normally one point will equal one percent of what your total loan amount is. Origination points, or fees, are paid for the services rendered by the loan representative.

Refinancing a home mortgage loan can be a good way of freeing up money for other uses but it pays to pay close attention through out the process because you don’t want some hidden cost or fee to make your new loan cost more than the original mortgage.




By: Andrew Bicknell

Lending companies need your business. If you are taking out a refinance home loan, check out what your current mortgage company can offer. Do not get a new loan from them unless they can offer you lower interest rates. On top of this notice, observe cautionary tips to get yourself a better deal on your new loan.

Getting A Refinance Home Loan

It is not always profitable to get a new loan with the same company if they cannot offer lower interest rates and they charge you more fees for the second loan.

Before getting a contract with a new lending company, know the following:

1. Is the service transferable?

2. Will you be going through the set up process anew?

3. Will you be paying another fee?

4. When will the current company forward the additional payments toward your refinance home loan?

5. Can you expect savings after the fees and costs involved in the new loan? (more…)