Equity Home Loan Refinancing - There are many factors to consider when deciding whether or not to refinance your home equity loan.
First, you must determine which type of home equity loan you have:
HELOC (Home Equity Line of Credit): A HELOC is similar to a credit card or other type of revolving line of credit in that it allows you to draw funds up to a predetermined limit. As with a credit card, this type of funding requires minimum monthly payments that fluctuate in accordance with the balance used, but will allow you to put additional payments toward your principal or pay your balance in full.
HEL (Home Equity Loan): With a HEL, you receive a lump sum of money and have a fixed monthly payment for the term of your loan.
Next, you'll need to determine the interest rate you're currently paying:
HELOCs have a flexible interest rate that adjusts according to prime. Unlike an adjustable rate mortgage (ARM), which is regulated by a maximum adjustment of 5-6% of the initial rate, there is no such cap in place for HELOCs. This means there is a much greater risk of escalating interest. Evaluate the interest you are currently paying on your HELOC, and determine whether your rate is increasing or holding steady.
HELs are typically financed at a fixed interest rate. Consider the interest rate you are currently paying when evaluating your equity home loan refinancing options.
Finally, evaluate your options:
Refinance HELOC into a HEL with a fixed rate. Though the fixed rate HEL may not be lower than the interest rate you're currently paying, you'll protect yourself from possible future rate increases.
Refinance HEL into a lower interest rate HEL. With this straightforward option, you'll secure a new HEL at a lower interest rate that will pay off your original loan.
Refinance original mortgage with cash-out option. Here, you'll refinance your mortgage with a cash-out option, and will use the funds to pay off your HELOC or HEL.
Refinance original mortgage to include HELOC or HEL. Commonly referred to as a rolling in loan, this option allows you to refinance your original mortgage to include the balance of your HELOC or HEL, which will be paid off once the loan closes.
Equity home loan refinancing is a daunting task with many factors to consider. Evaluate your personal financial scenario and thoroughly examine all options to ensure that your refinancing decision is financially sound and prevent making a costly mistake.