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Since the rates are low we would like to refinance our home. We have owned the home home for 10 years. We would like to put some money down,get a lower interest rate, and change the term to 10 years. When I called the bank the person recommended a Home Equity Loan since we don’t have to pay for the processing like we would a mortgage. He also said since the amount was less than $ 100,000. Does anyone know about this? I have asked around but I think people get confused with a HELOC. Thanks.
Thanks livein md. Are current rate is 6.75% and the one we were looking at would be 4.5%. We are thinking of putting some money down. So it would not be not more than $ 60,000. Thanks.

3 Thoughts on Is a home equity loan a safe option than refinancing our mortgage?
  1. Reply
    liveinmd
    July 22, 2012 at 11:06 pm

    Home equity loans are usually HELOC (open ended with a limit like a credit card). There are also 2nd mortgages which, like first mortgages, have set terms (this many years, for this payment amount due every month). Since you don’t want cash out, a HELOC is not a good choice. What they are suggesting you do is pay off your first mortgage by “charging” it on the HELOC but these loans usually have adjustable rates and terms so you could end up paying more in the long run.

    Your best option is going to be a first mortgage even if you have to pay fees. Rates on first mortgages are always lower than those on 2nd mortgages or HELOTS because they are always a higher priority and have higher standing in being paid off if the property has to be foreclosed on or a bankruptcy occurs. In short, second and HELOCS must price their loans with the higher rates to account for the higher chance of not getting paid back.

    What is your current rate? If the new rate is not low enough to make paying the fees worth it then just pay a chunk of your mortgage off with the money. This will reduce how much each of your payments that goes to interest and will take years off the term. Use a mortgage calculator to figure out how much you would have to pay each month in order to pay off the remaining balance in 10 years. This may be a more viable option

  2. Reply
    Bob
    July 23, 2012 at 12:05 am

    If you are getting a fixed rate, take it. I refer people with smaller loan amounts to a local credit union for very similar terms all the time. You might get .25% lower with a traditional first mortgage, but you’ll pay more over the term of your loan because of the closing costs. For a $ 60K loan for ten years, a .25% difference in rate changes your payment by only $ 7.63. Over the ten year term that comes out to $ 915 so you would need closing costs of that amount just to break even with the deal you are getting. You won’t find a traditional mortgage at that rate with costs under $ 2000.

  3. Reply
    godged
    July 23, 2012 at 12:39 am

    Every refinance costs you money in closing costs, it may not come out of your pocket, but it will be in there somewhere.

    I know this gets confusing, but this is what I would suggest. Ask the lender that you are using for an estimated closing statement, or whatever they call it. It is basically a break down of everything you will be charged for this loan, appraisal, origination fees, points, blah blah blah.

    Sometimes HELOC rates are not fixed, I would check that. If the rate is not fixed, pass.

    The only reason I can see that the HELOC (if it is a fixed rate) would make sense is if you are planning to sell soon. Since the closing costs on your refinance would be about $ 2,000 (just guesstimating here), you would have to be there awhile to have this expense make sense.

    Another thing, a bit of unsolicitated info, about putting money into this/shortening the term. Probably a coin toss whether this makes sense or not, depending on your situation. You may want to discuss this with a financial planner to see if this strategy fits with your financial goals.

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