Refinancing vs. Home Equity Loans
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For home equity lines of
credit (HELOCs), most banks set their rates based on the
shortest-term market rate of all, the Wall Street Journal
prime rate. It moves in lock step with the fed funds rate.
The Fed has been currently in a
rate-rising mode. This is pushing rates on home equity lines of
credit higher for both new and existing borrowers, as HELOCs carry
variable interest rates.
But equity loans and lines of
credit usually come without closing costs, so they can be $2,000 or
$3,000 cheaper than a mortgage refinance.
It is relatively rare, but if
you can get as much money as you need with good terms on a home
equity loan as you can on a mortgage refinance, and you can get a
rate that's attractive and lock it in, then that seems like a very
wise thing to do."
The best home equity loan candidates
So who should go for an equity
loan or line of credit rather than a cash-out refinance mortgage?
Consumers who plan to pay off
their loans in a reasonable amount of time and those who don't need
to borrow much money make good candidates. That's because banks
offer their lowest rates on shorter-term equity loans.
Long-term equity loans tend to
have rates that are higher than fixed-rate mortgages, even when the
prime rate is low. And, customers who need $75,000, $100,000 or more
will usually find they need loans with longer amortization schedules
to keep their payments affordable. Most equity loans amortize over
10 years or 15 years, while many first mortgages amortize over as
many as 30 years.
Customers who took out first
mortgages during periods of extremely low rates may want to consider
equity loans or lines of credit too. It doesn't make sense to
refinance into a new first mortgage at a larger balance and higher
rate and pay a couple thousand dollars in closing costs to do so.
If you've got a favorable rate
on a first trust deed mortgage, something in the high 5s there about or
low 6s, you don't want to pay off a $100,000 mortgage to take out
$20,000 and raise the rate on the whole amount. You're much better
off borrowing $20,000 and keeping the first mortgage.
Mortgage Glossary11
