Home Equity Loan Refinancing

If you are looking at refinancing your current home equity loan, now may be a good time. If your house still has positive equity, you can get the mortgage that you currently have on your home refinanced at a better rate than when you originally borrowed the money from the bank. At the time of writing, interest rates are at an all time low with Annual Percentage Rates (APR) at about 4% or 5%. There are a lot of options to choose when it comes to home equity loan refinancing.

Adjustable Rate Mortgages vs. Fixed Rate
If you are not planning on staying in your home for a long term, you may want to consider an Adjustable Rate Mortgage. An ARM starts out with a lower interest rate and lower monthly payments that can be locked in for the first few years. Then when you move, you refinance your more permanent home with a fixed rate mortgage. You may have to pay a pre-payment penalty, but it could be worth it. Just be careful that the terms are set. If you are in your home beyond the first few years then your payments and interest rate will be recalculated, but it could still be less than a fixed rate.

Home Equity Line of Credit
Abbreviated HELOC, these are a revolving line of credit much like a credit card that is backed by your home. The bank will determine your spending limit based on your homes equity. The interest rate is usually variable and fluctuates with the market but is required by law to have a cap (or ceiling), a predetermined interest rate that it cannot go above. You can use the money for everyday purchases, but it is normally used for large purchases like home improvement, debt consolidation, college tuition or medical bills.

Duration of the Loan and How Much you should Borrowbr> Home equity loans can be anywhere from 5 years to 30 years in duration. The shorter the home equity loan, the lower the interest rate. You should only borrow what you can pay back over the allotted time. A good rule of thumb is to not borrow more than 80% of your homes equity.

Buying Points and Saving for a Down Payment to Reduce APR
A point is essentially 1% of the loan and is either paid up front or rolled into the mortgage itself to be paid before you begin paying down the mortgage (or principle). Until the points are paid, your monthly payments may be a little bit more, but once they are paid and you begin to pay down the mortgage, your monthly payment may go down, plus you will have a lower interest rate. So, buying points might be a good idea if you are refinancing a home equity loan for 30 years. If you don’t pay for the points up front, you can usually pay them off within the first few years of the loan.

The whole idea behind refinancing a home equity loan is to lower your APR and reduce your monthly payments while simultaneously accessing your homes equity to pay for debt consolidation, college tuition, home improvements and the like. When you refinance, by making a down payment with the money that you have been saving, you may abate any penalties that may be associated with the original lender and get a lower interest rate which can save you hundreds or thousands of dollars with home equity loan refinancing.