Home Equity Line Adds New Option to Refinancing
If you're looking to refinance your mortgage but you also need some extra cash, there may be a few options out there you haven't considered. Today's re-fi rates are low, but to get the best deal overall, your best bet may be to refinance your principal loan at the lowest rate you can find and then to apply for a home equity line for the cash.
That way, with today's low home equity rates, you'll get the best interest rates for both portions of your financing.
The other main option is a cash-out refinance, in which the borrower takes additional cash above the loan amount. But that usually means an additional 0.5 percent or more in interest, which can add up to thousands of dollars over the course of a 30-year loan. Instead, simply refinance the balance of your mortgage, and then apply for a home equity line for the rest.
Right now, home equity rates are at prime or prime plus 0.5 percent to 1.0 percent, a lot better than almost any other kind of loan out there, including personal loans and credit card debt.
Cash-out refinancing is not a real option for homeowners who are underwater and need to borrow more than 80 percent of the value of their home. And while there are 95 percent loan-to-value mortgages out there, you can't be living in a declining market such as Arizona, California, Florida, Michigan and Nevada. Also, if your credit score is below 680, you'll need to turn to the FHA for the refinance if you want anything more than a 90 percent loan-to-value mortgage.
Generally in today's market, even if you don't live in a declining market, you probably won't be able to get an equity line if it means going above 90 percent loan-to-value. And even that could be difficult, unless you have a credit score over 760. Therefore, home equity lines are a better choice for smaller projects, like making needed repairs on your home.
Also, think twice before paying off credit card debt with a home equity line. While you may be paying a high price for credit card debt, transferring credit card debt to an equity line means you are exchanging unsecured debt (debt that is not guaranteed by an asset) for secured debt (in this case debt that is secured by your home). That means, if for some reason you can't make the payment on your equity line, the lender has the right to foreclose on your home. You can learn more about how equity lines work in the Federal Reserve's pamphlet "What you should know about Home Equity Lines of Credit."
Millions of people put their homes at risk because they used the equity in their homes as a piggy bank and borrowed to levels that are now higher than what their homes are worth. Some have walked away from these homes because the combined mortgage and equity line is higher than what the home's value is expected to be for 10 or 20 years.
But if you need the cash, and it will put you in a better position financially, you're better off choosing an home equity line than a cash-out refinance.
Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Personal Bankruptcy and The Complete Idiot's Guide to Improving Your Credit Score.