Home Equity Loan - Good Idea? Or Refinancing Your Home?

Home equity loans and mortgages are a good idea now

Home equity loans and mortgage have taken off since the stock market exploded in 2000 and investors started looking for other places to put their money. Real estate has become the popular choice, and the sagging economy has combined with aggressive marketing and buyer interest to create ideal conditions for obtaining home equity loans and mortgages. Interest rates are currently near 30 year lows, and buyers are taking advantage of these good conditions by taking out mortgages and home equity loans at a record pace. But taking out a second mortgage or refinancing may not be the best idea for everyone. Is now a good time to obtain a new mortgage? When might it not be a good idea?

Traditional thinking suggests that it makes sense to refinance only if you can lower the interest rate on your mortgage by one to two percent. Anyone who can lower their rate by two percent would be wise to do so, but others may benefit from significantly smaller reductions. The cost of obtaining a loan has dropped in recent years, and in some cases, a reduction of only one-half of one percent might make sense. The key is how long the homeowner intends to remain in the house. The costs associated with the new loan are amortized over the life of the loan, so a resident who intends to stay in his or her home indefinitely may find a small reduction worthwhile. In fact, for many homeowners, a long-term payment reduction of $50 might be enough to justify a new loan. For others who may intend to move in a few years, a larger reduction would be necessary in order to offset the larger expense.

Right now, refinancing would be a good idea for those with an ARM, or Adjustable Rate Mortgage, as 30-year fixed rates are actually lower than for ARMs. This is an unusual situation that seldom occurs in the market, and homeowners would be smart to take advantage of it. With an ARM, the rate is likely to go up, but a fixed rate loan is good for the duration of the payment schedule.

Anyone thinking about a remodeling project would logically consider a home equity loan or line of credit, but a complete refinance might make sense if the project has a fixed cost and the homeowner intends to remain in the home for a few years. Banks will lend money with the option of taking cash out for the improvement project. The interest is tax deductible on both types of loans, but the rates are more favorable for a first mortgage than with equity loans.

Those who took out a piggyback loan at the time of purchase in order to avoid paying private mortgage insurance may also benefit from consolidating their two payments into one by obtaining a new mortgage. As long as the equity in the home exceeds 20% of the value, the borrower will not have to pay PMI. The same technique could work for anyone with a large credit card balance; the loan could be consolidated into the mortgage. Be careful with this one, as failure to pay off the debt could result in a foreclosure.

There are far more advantages than disadvantages in refinancing right now, and anyone with one or more existing loans would do well to