Refinance Home Equity Loan: Why Do It?

A home equity loan is in itself a refinancing opportunity. Essentially you are taking out a second mortgage in an effort to access the equity that has built up. When you first moved into your home, you more than likely had to take out a mortgage. As you paid on that mortgage, your home began to build equity. Now that several years have gone by and interest rates are lower, you can refinance your mortgage and access a home equity loan.

Know How Much you can Borrow
Before you can get a home equity loan you and your home have to meet certain criteria. In order to get a low rate, you have to know where you stand financially. First of all you have to have positive equity. When the housing market fell into a recession the value of many homes fell too. In some cases a house is worth less than the mortgage that was taken out on it. In those cases you end up with negative equity and no matter what you do, you will not be able to get a home equity loan so don’t even bother to consult anyone and pay a potential fee.

Now let’s do some math. Take a look at your current mortgage statement to see how much you owe. Since the housing markets have changed look to see if any other houses in the neighborhood are selling and see how much they are worth. If you can’t find a good comparison, you may have to pay for an appraisal (which you’d have to do anyway). These usually cost about $300, but by paying for it now, you don’t have to roll it into closing costs and this will help you to get a lower rate. If your house appraises at less than you owe on it your search ends here.

Some banks may allow you to borrow 125% of your homes equity. If you do this, your chances of foreclosure go up. At 100% you’ll usually have a higher interest rate. A good rule of thumb is to borrow a maximum of 80%. If you own a home that appraises at $200,000 and you have $100,000 left to pay on it, you have $100,000 in home equity of which you should only borrow a maximum of $80,000. By borrowing only what you need you can get a lower rate on your home equity loan.

Process of Refinancing a Home Equity Loan
Begin your comparison of lenders with the bank that currently has your mortgage. If you voice your interest in refinancing you may be able to get a break on some of the closing costs; they may wave the application fee, if your mortgage was taken out within 5 years they may wave the appraisal and inspection fees, etc. The lender starts out with your application. This may be something that you fill out on your own, but usually they sit down with you to get all your information so you will need documentation of your current employment status (pay stubs or tax forms), checking and savings account balances (bank statements), credit card statements and other documents that include your personal information.

If you haven’t already brought them a copy of your credit reports from all three bureaus, you will have to approve their inquiry into your credit reports. Once the lender has all of your information the amount of money you can borrow, loan duration, interest rates, monthly payments, and closing costs can be determined. Be sure to read the contract, ask questions and verify for yourself that you can meet the criteria for paying back the loan before you sign anything. You definitely don’t want to risk foreclosure when you refinance a home equity loan.