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Mortgage Refinance/Equity Lines

Mortgage refinancing occurs when you already own a home but need to renew the terms for one of many reasons.  Mortgage refinancing is a great way to tap into your home's equity for repairs or to pay off other loans.  Reasons why people refinance vary.

  • Changing to a shorter loan length.
  • Debt consolidation for car loans, home equity loans, student loans and/or personal loans.
  • Desire a lower interest rate to lower their monthly payment.
  • Home needs repairs or upgrading.
  • Need money to make payments off credit card debt.
  • Want to make the home more energy efficient.

There are three forms that can be used for refinancing.

  • Home Equity Line of Credit:  Home equity lines of credit works much like a credit card.  You borrow when needed and make monthly payments.  Most home equity line of credit loans allow you to make charges for ten years and then you will be required to make monthly payments to pay off the loan.
  • Home Equity Loan:  Similar to a personal loan.  You lock in an interest rate and then make monthly payments for a period of time.  Home equity loans are not as lengthy as traditional mortgages though.  Typical time frames for home equity loan repayments are ten to twenty years.  You pay your home equity loan in addition to your mortgage.
  • Standard refinance:  You simply take out a new mortgage.  Your old mortgage is paid off and you begin making payments on your new mortgage a month after closing.  This is common with people who want a lower interest rate or want to tap into their equity.

Refinance Mortgage

Refinances work just like mortgages.  You lock in an interest rate, pick your loan term (15, 20 or 30 years) and make monthly payments that cover interest and principal.  Like any mortgage or loan, your credit score helps dictate the interest rate for which you will qualify.

Refinancing makes sense in many situations.  If your furnace dies, you will need cash on hand to purchase a new system.  Few people have that amount of cash on hand, so refinancing and tapping into the equity in their home can help out tremendously.

Home Equity

Equity is important for home equity loans.  The equity is the difference between your home's current value and the amount of remaining mortgage you owe on your home.  If you purchased your home for $120,000 and that home is now valued at $220,000, you have $100,000 or more in equity.  With a home equity loan, you are borrowing against your house.  Much like a mortgage, if you fail to pay your home equity loan and go into default, you can lose your home.

One of the biggest problems with a home equity loan is that home values do not need to continually increase.  They can decrease.  Current home values are declining in many markets.  People who borrowed against their equity are now in tight spots because their home simply is not worth the amount of money they owe on it.

Take a home that was purchased for $100,000 and it rose to $200,000 within ten years.  The owner took out a loan of $80,000 to pay off other debt and to make renovations bringing his mortgage to $180,000.  Now home values have declined and his home is now worth $150,000.  If this happens, selling the home leaves him $30,000 short of funds to pay off the mortgage and home equity.  He's stuck making payments on a home that is not worth as much as he is paying.  This is the trap many homeowners are currently fighting.

Remember that home values are not guaranteed.  Housing markets do fluctuate.  When taking out a refinance, you're safer leaving a bit of a pad just in case!

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