Home Refinancing vs.
Home equity Loans and HALOCS
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
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 houseâ€™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
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.
"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?
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.
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.
all your debts through one big mortgage is more advuisable.
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.
will effects and worsen our credit score for future reference,
with no doubt.
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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