Should You Refinance?

When we talk about refinancing your home versus equity, it helps first to understand why you’re getting a loan, since this can influence the type of loan you want/need. Are you trying to pay off credit card debt that has high interest rates? Or are you trying to get a lower interest rate on your current home loan, and bring down your monthly payments?

Your answers can help determine which option is best for you. For instance, when paying off credit card debt, it doesn't make sense to refinance your current mortgage, since this is basically stretching out the credit card debt for a 30-year period. Instead, in this case, it makes more sense to get a home equity loan, that is paid off in a shorter period of time (and  is often tax-deductible!)

At the same token, if you own a great deal of equity in your home and you’re paying an interest rate higher than 8.5 percent on a 30-year fixed mortgage note for more than 8 years, what should you do? Do you take out the home equity loan, or refinance for a lower rate?

The smart decision would be to refinance your home equity for a lower rate. Chances are you would actually get some cash back out of the deal.  This is the best -case scenario for refinancing, because it actually saves you money on your monthly payment. Generally, refinancing is advisable if it lowers your interest rates and/or lowers your monthly mortgage notes.

Then exactly what is a home equity loan? It’s synonymous with an owner’s interest in their home, or the difference between the fair market value and current indebtedness. In other words, the value an owner has in their home versus the financial obligation against the property.

Over 33 million Americans are in debt. And a good percentage of the debt-ridden population who are homeowners will refinance their debt as opposed to getting a home equity loan.  Commonly used to pay for college tuition, consolidate bills into one easy payment, for remodeling/major home construction, the purchase of a new car, boat or RV, or make investments, home equities are the better choice versus refinancing for the following reasons:

1. There aren’t any closing costs associated with a home equity loan.

2. If you currently have a lower interest rate, it’s better to get a home equity loan.

3. You will be required to pay for private mortgage insurance if you end up borrowing more than 80 percent of your home’s equity. In most cases, it’s cheaper to take out a home equity loan.

4. The interest paid on your account should be tax deductible on the first $100,000 of home equity and up to 100% of your home's value. (Consult a tax advisor.)