The Fed is currently in a rate-rising mode. This is pushing rates on home equity lines of credit higher for both new and existing borrowers, as HELOCs carry variable interest rates.
But equity loans and lines of credit usually come without closing costs, so they can be $2,000 or $3,000 cheaper than a mortgage refinance.
It is relatively rare,"But if you can get as much money as you need with good terms on a home equity loan as you can on a mortgage refinance, and you can get a rate that's attractive and lock it in, then that seems like a very wise thing to do."
The best equity candidates
So who should go for an equity loan or line of credit rather than a cash-out refinance mortgage?
Consumers who plan to pay off their loans in a reasonable amount of time and those who don't need to borrow much money make good candidates. That's because banks offer their lowest rates on shorter-term equity loans.
Long-term equity loans tend to have rates that are higher than fixed-rate mortgages, even when the prime rate is low. And, customers who need $75,000, $100,000 or more will usually find they need loans with longer amortization schedules to keep their payments affordable. Most equity loans amortize over 10 years or 15 years, while many first mortgages amortize over as many as 30 years.
When interest rates drop, you can refinance your home equity loan and save money.
"Refinancing tends to happen in surges -- in fits and starts," says Bill Hampel, chief economist for the Credit Union National Association in Washington, D.C. "Typically, rates should fall a point or more before you do it."
Refinancing entails closing costs and other fees, so it's important to know whether lower monthly payments will offset that cost. Consider how long it will take you to break even. For example, if refinancing costs run you $2,500 and your payments are $100 lower each month, it will take you 25 months to break even.
Benefits of Refinancing a Home Loan
Like most homeowners, you’ve probably heard compelling reasons for refinancing your home loan:
Keep your payments stable with a fixed-rate loan
Lower your interest rate
Get cash out from your home’s equity
Consolidate debt
But how do you know if it’s the right time for you to refinance?
LendingTree has a mortgage refinance calculator, the Mortgage CheckUp, to help you compare your mortgage home loan to current loan options and interest rates, and decide if refinancing is the smart move.
Once you’re ready to refinance, we can connect you with lenders providing a wide range of home loans including cash-out refinancing. Our lenders compete for your loan by offering mortgage loans with competitive refinance rates that can save you money.
When comparing your home mortgage refinance options, you can choose between fixed rate loans and variable rate loans, both for 15 or 30 year terms. You can also compare refinance interest rates, points and other loan options to find the best mortgage for your financial needs.
There are many good reasons to refinance. With today's low interest rates, you may be able to save on your monthly payments. Mortgage refinancing can also give you cash back to use for home improvement or other purposes, or to consolidate debt or eliminate credit card debt. If you already have two loans or a second mortgage, refinancing both loans can simply your finances and save you money at the same time. You can also choose to change your payment terms, such as converting to a fixed rate loan to lock in low interest rates, or change to a shorter mortgage term to pay off your home more quickly.
When you are ready to refinance, LendingTree can help you enjoy all the benefits of a home refinance loan custom-fitted to your needs.
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