Home Refinancing vs. Home equity Loans and HALOCS

By Jon Dital

The past year has been a great year for home refinancing. Loaners who had high rate running mortgages successfully replace them with new loans. This process is called home refinance or mortgage refinancing, and it is a process that can be performed with a relative ease: The loaner needs to get an approval for a new mortgage and then decide vis-à-vis the costs, whether the refinancing process is worthwhile. Obviously, if we can overall save money (after covering our costs) - than this process is worth checking.

Another method that many loaners tend to use today in parallel to their running mortgage, is taking a Home Equity Loan or even applying for a HELOC - Home Equity Line of Credit. Those are new mortgages that use the equity left on your property and allow the loaner to enjoy the relatively low rates in such instruments.

This article will take a look at this perilous phenomenon, and will try to explain why performing home refinance is advisable while taking on new debts through home equity instruments is not wise.

Equity is the part of your property that you actually own: The house’s appraised value (the property value/current cost) minus the amount owed to the lender or the debt. So, as we have minimal debt we actually have a lot of equity and vise versa. Based on the equity, a lender may decide to issue a loan or even a new mortgage, referred to as a Home Equity Loan.

Home Equity Loans: Home equity loans and HELOCs are different than mortgage refinancing since after taking one of these instruments - the loaner will have 2 running loans on his  property: the original mortgage and the new home equity one. The idea is like cashing out - you use the “already owned” part of your house to increase debt for different purpose. The problem is that Home Equity Loans take more from our equity - meaning we own less of our home and have greater debt, and usually this is done in worse interest rate than what we would have gotten on a consolidated refinances mortgage.

HELOCs: HELOCs are "Home Equity Lines of Credit", a home-loan that has an interest rate that changes with the prime market rate. The rate is usually the Prime Banchmark +/- a certain margin.

Again, like the Home Equity loan - the Home Equity Line of Credit uses the rest of the property 's equity as the collateral. This instrument can serve for many purposes:  Personal or leisure targeted loans, cash to pay tuition, home-improvement purposes, etc.

With HELOC, the lender approves a credit line, which is derived from a percentage of the home value. If the home is still in mortgage, the principal left will be subtracted from the credit line.

As opposed to ARMs - Adjustable Rate Mortgage - HELOC has no barriers that prevent the changing interest from leaping more than a certain percentage annually, or monthly. This is the main problem with them, since in 2-3 years, with different market rates - we can pay much more on these lines of credit.

Why is it different from mortgage refinance?

• With Home equity loans we get 2 running loans: the original mortgage and the new home equity loan/lOC. This causes 2 or more monthly payments to track and riskier prospects for mishaps with late monthly payments and overall financial disorder.

• As mentioned above: we will get worst rates for Home Equity Loans than fixed rate in conventional refinanced mortgage, or worst terms for HELOC Adjustable rate than conventional ARM.

• Consolidating all your debts through one big mortgage is more advuisable.

• After taking these loans, we may not have enough equity Unable to  get new loans or to refinance our debts when the market rates will be even more appealing.

• This process will effects and worsen our credit score for future reference, with no doubt.

My conclusion: Though home equity loans are a good way to use today's low rates for cashing out refinance, I believe that they should be used solemnly for Home Improvement purposes, such that will raise eventually the value of our property. Thus, we will own more equity and our equity debt ratio will not be harmed. Using these instruments as alternative for debt refinance is not advisable and can costs us more in the future.

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