Refinance: Straight or Home Equity Loan

Real Estate
on August 7, 2012

Homeowners who are interested in refinancing their homes are often confused by all of the options available to them. The truth is that the best option for you depends on the situation you are in and whether or not you need to come out of the refinance with cash-in-hand. The two most popular options are a straight refinance and a home equity loan. When saving money is important to you, you need to look at the advantages and disadvantages of both of these options.

Straight Refinance

One of the main benefits of a straight refinance is that you can actually lower the interest rate, as well as your monthly payment amount. This is great when saving money each month is your priority. This is most advantageous when the interest rate on your current mortgage is much higher than the current rates. Many homeowners are able to save hundreds of dollars a month by a straight refinance.

Another benefit of straight refinances is the fact that it may not cost you a dime out of your pocket. Many lending companies will actually allow your closing costs on the new mortgage to be rolled over into the balance. This, of course, does increase your balance on the loan, but if it can save you money, it may be worth it for you.

The major downside of a straight refinancing of your home is that you do not receive any cash from the equity you have built up in your home. If this is a major consideration for you, you may want to consider a home equity loan.

Home Equity Loan

For the homeowner who needs cash, a home equity loan is often a good choice to make. The idea behind this type of loan is to allow homeowners access to the equity they have in their property. This is not a refinance. It is simply a second loan on the property.

The main advantage of taking out a home equity loan on your property is that it will give you much-needed cash when you need it. If you have built up a large amount of equity in your home, it can allow you the opportunity to take care of repairs or updates to your home.

One of the downsides of this type of loan is that it will generally come with a higher interest rate than what you would get on a straight refinance. However, by shopping around, saving money is very possible on the interest rates.

Another advantage is that the closing costs on a home equity loan should be much lower than if you were refinancing the entire balance. The closing costs will be paid on just the equity you are taking out. Along with this, your loan will actually have a shorter term, which means it will be paid off much quicker than a traditional mortgage.

Generally, an equity loan is established on a property in second lien position behind an existing first mortgage. The purpose of an equity loan is to access the equity built up in a property without having to refinance the first mortgage. Generally, homeowners establish an equity loan when they have a lower interest rate on their first mortgage than current interest rates, but they need to access the equity they have built up in the property for another purpose.

When saving money is important to you, you will want to consider which option is best for you in regards to your current mortgage. For many homeowners, it is all about saving money and the straight refinance makes the most sense. However, for the homeowner who needs cash, a home equity loan may be their best option. Before you make any move toward any changes to your current mortgage, take it upon yourself to do the research and evaluate your own situation to make an educated decision.

Found in: Real Estate
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