when and how to act
Step 1: Deciding if you want to give home equity loan refinancing
Your choice to refinance rests on several factors. Before you decide
to refinance, ask yourself the following questions: What is the
length of time you have owned your current home? Do you foresee not
being a homeowner any time soon? What has your credit history done
since obtaining your original mortgage? Will the refinancing savings
outweigh the costs of refinancing? What happens if your loan is paid
off before its term is up? Will you be penalized?
Why would you want to refinance in
the first place?
The majority of people refinance in
order to lower their monthly loan installments. Especially, if
home equity loan rates have dropped drastically since you signed your original
mortgage, you should be eligible to slash your monthly payments way
back. But this is not the only reason people refinance - There
are many other justifiable causes worth pursuing.
Let's say you desire to tap into the
equity your home has built up since you first purchased it. In this
scenario, you can take part in a "cash-out refi".
This is when you take out a new home equity loan
based on your home's most current appraisal. You then pay off
the remaining balance on your old mortgage and cash out the
You might even desire to reduce the
lifetime of your home equity loan. This can be done by
exchanging your current mortgage to one of half the length (a
30-year to a 15-year mortgage). Assuming home equity loan rates have
dropped low enough - which they have - it is possible to reduce the
length of your loan without increasing your current monthly
Another popular reason worth refinancing
is exchanging an Adjustable Rate Mortgage (ARM) to a fixed rate
mortgage. Now, that home equity loan rates are extremely low,
this might be a great idea - before the rates rise again. Then
again, considering that introductory ARM's are usually lower than
fixed mortgage rates, if you foresee the rate not rising any time
soon, this is another viable refinancing option. However, if
you already have an ARM and you foresee a drastic increase in it,
you can exchange your current ARM for another ARM with a much lower
introductory rate. Since there are so many options, make sure
you talk them over with somebody who knows the refinancing business.
Nowadays, since "no-cost" refinancing
is available, the old rule that said to only refinance when the rate
was down two points is no longer applicable. Remember,
however, the term "no-cost" can be misleading because all it means
is that you will not have to pay fees during closing. The
closing fees still exist - They are just added into the loan itself,
or, they are mixed into the home equity loan rate - thus making it
higher than normal.
The determining factor, however, is
whether you will reacquire your refinancing costs in a timely
manner. In other words, calculate what you will be saving per
month and compare that to the up front costs of refinancing your
mortgage. How many months will it take until you break even?
Will that be too long of a duration in order to meet your needs?
Do you plan to still be residing in your home for that long or is it
too far off to tell? Make sure you answer these questions as
honestly and unbiased as possible. If you do determine that
you are planning to reside in your current home for a definite
length of time, refinancing your mortgage is a wise decision.
The Time Not to Refinance
The biggest issue to consider when exploring the reasons not to
refinance is the duration that you have been paying off your current
mortgage. In other words, the longer you have been paying your
current mortgage, the less propitious are the benefits of home
equity loan refinancing. However, even if you only have a
couple years left to pay on your mortgage, if there is a great
difference between new mortgage rates and your original rate, it may
still be well worth the effort to refinance. Just remember to
do the math before making your verdict.
Keep in mind that your house payments
in the beginning phase of your mortgage are practically all
interest. Even though interest is tax deductible, it still
means you will be paying for it - There is no such thing as 100% tax
deductible insurance. Sure, each dollar you fork over in interest is
deductible on your tax return; However, what you save in taxes
corresponds to your particular tax bracket. For instance, if you
fall in the 31 percent bracket, you are only eligible to write-off
thirty-one cents, rather than an entire dollar.
The only sure method of circumventing this
problem is to exchange your mortgage with one whose term is half the
length of the original term. Although you will not be saving
as much by the month, your savings in the long run will be thousands
of dollars greater due to lowered interest costs.
A further consideration is to check
for an early-payment clause in your current mortgage, which would
penalize you for paying off your mortgage before the end of its
The timeframe for this clause is
generally restricted to no more than two years before the end of the
loan, although some lenders will only restrict you to five years. The
penalty fee also varies. Sometimes it might be a predetermined
percentage of whatever the remaining balance on the loan happens to
be, while other times it may just be one month's worth of interest.
The reason many lenders include this in their loans is to guarantee
them a profit gain, whether or not you pay the loan off early.
In return, the lender will normally cut the home equity loan rate
Make sure you look for this clause in
your mortgage contract. If it is in there, it should state the
amount and method of penalization, as well as the penalty time
period. Remember, any loans granted or backed by the
government are prohibited in issuing early-payment clauses.
How Much Will Refinancing Cost Me?
Since refinancing essentially equates to writing up another loan
from scratch, you can expect to pay fees similar to what you did
when closing your initial loan. These fees will probably
include appraisal fees, title insurance fees, a title search (there
are exceptions to this), loan origination fees, as well as new
Remember, the key to cutting down
your costs is by driving a hard bargain. Always try to work
something out with the lender of your original mortgage - They will
want to keep your business, and should be willing to waive some fees
if you cajole them. Do the same with other lenders. Use
whatever quotes you get as bargaining tools with them. They
will probably waive fees if they see that their competition did as
well. Even if you cannot get the fees waived, if you pay them
off initially, you will most likely get the lowest home equity loan
If you would rather not pay closing
costs at all, you may do so by electing a slightly higher interest
rate (Do the math first and see if it will save you in the long
run). Or, you can roll the fees into the refinanced mortgage and pay
them off over time.
Home Equity Loan Refinancing Guide