Should You Get A Home Equity Loan When Refinancing?

Take Advantage of best refinancing rates

Home Equity loans and lines are among the most economical lending solutions available. Depending on your unique financial situation, the interest paid can be tax deductible. They are flexible and generally offer the best rates. There are many advantages to a home equity loan. Refinance with caution, still.

There are two types of home equity loans. The actual loan is usually a fixed rate with a specific time period in which the loan will be paid off. The payment is also fixed. These types of loans are good for the borrower who has a specific amount in mind. When consolidating debts, such as credit cards, student loans, car loans, or doing specific home improvements, a person will use a home equity loan to put all their payments into one, usually, lower payment.

A home equity line of credit is a more flexible option. This type of loan is open ended. The rate and payment is generally variable and tends to be lower. You can use a line of credit somewhat like a credit card with added tax benefits. You only pay interest on the portion of the line that you use and the rest is available for you when you need it. When you make payments, the portion applied to the principle is made available for use again. Many lenders offer a card for easy access. This option is useful for those who don't have an immediate use for the funds or want to have the flexibility to keep borrowing without going through the application process over and over.

When you refinance your existing mortgage and have equity left over, many times you will be offered a home equity loan or line. If you have additional debts that you did not include in your first mortgage, a home equity is a good way to go. Why would you not include all your debts in the first loan you ask? Well, many times, debt is split into two loans in order to keep the larger portion under 80% loan to value. This allows a borrower to take advantage of the best rate. The lower your loan to value is the better your rate will be. Keeping a loan under 80% of the appraised value of your home will also allow you to avoid paying costly PMI, or Private Mortgage Insurance.

If you do not have use for a second loan at the time you are refinancing your first, you can get a line of credit. Even if you don't use it right away, it is a good thing to have in case of an emergency. When you need it, it's there ready for use. You will not need to go through the lengthy application and approval process all over again. Another benefit is that they can use the same credit inquiry and appraisal that they used for the first loan. One thing to be aware of is that there is usually an annual fee for a line of credit. Ask your bank about any special programs they may offer to help offset this cost. Sometimes they will negotiate with you to entice you to take the offer.

As you can see, there are many benefits to both home equity loans and lines. Carefully weigh all of the options before you make your decision. Talk about the cost and ask about any hidden fees so that you can make the most informed decision possible.


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