What are Home Equity Loans and Refinancing A home equity loan is thus a kind of loan where a homeowner is able to borrow money on the basis of the value that he has accumulated in his house. Equity is defined as the relationship between the value of your house and the amount of money that you have on your home. For instance, if a house is valued at $300,000 and the homeowner has $200,000 on his/her mortgage then the owner has an equity of $100,000.
Home Equity Loan allows the lenders to lend money up to a certain percentage of the property value excluding the mortgage amount. The loan limit and the interest rate vary with the credit scores, income, the balance of loans on your credit report and the proportion of the home you own.
A number of homeowners use home equity loans for important purchases and other needs such as home repairs and renovations, children’s education, medical bills and other bills, or to pay off credit card debts with high interest rates. However, there are instances when something happens and your financial status changes after you have borrowed the money. This often make the homeowners to ask some questions such as - Is it possible to refinance a home equity loan?
Some of the benefits of refinancing a home equity loan include the following: There are a few common reasons why refinancing an existing home equity loan could be beneficial:There are a few common reasons why refinancing an existing home equity loan could be beneficial:
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To get a lower interest rate: We have seen that interest rates are not fixed and vary with time. If interest rates today are lower than the rate you agreed with your first home equity loan, then refinancing could shave off thousands in interest charges for the total amount of the loan repayment period.
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To withdraw additional cash from the equity: Depending on the amount of equity you have in your home or how much more you have paid off of your mortgage since the first home equity loan, you can generally take out more cash when refinancing.
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To shorten or lengthen the repayment term: It may help to change the repayment schedule of your home equity loan so that it fits your budget or other objectives more appropriately. For instance, reducing the term will mean higher monthly payments but less money spent on interest in the long run.
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To switch to a fixed interest rate: For those of you with an ARM home equity loan, refinancing to a fixed rate might provide you with that added comfort and stability to your monthly payments.
First, I’ll explain what refinancing a home equity loan is in detail and when you might need to consider doing it. When refinancing any loan, the process will be similar:When refinancing any loan, the process will be similar:
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Review your credit report and score: Like with any financing, the credit score will also be reviewed before you are considered for a refinancing. It is important that you check your credit to be sure that there is no negative information that is not informing your score.
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Research current interest rates and lenders: Always make comparisons between various lenders in order for you to get the best deal as you borrow the money. Target on both the best rates that you can get and the lowest fees possible.
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Submit your application and supporting documents: You may be asked to submit banking statements, income tax returns, details of income, and other appraisals.
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Get an updated home appraisal: The lender will need an appraisal to verify the current value of your home and your remaining equity. Costs range from $300$500.
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Evaluate closing costs: Lenders should be asked to present a Loan Estimate that discloses total origination fees, title fees, and other closing costs to complete the refinancing. Shop around among lenders.
- Close on your refreshed home equity loan: The final loan documents include signing and after that, the lender will discharge your previous loan balance. Make sure you know the rate of the new loan, the length of the term and how you are going to pay off the loan.
Considerations in the Process of Refinancing Home Equity Loan Here are some important considerations when weighing whether to refinance an existing home equity loan:Here are some important considerations when weighing whether to refinance an existing home equity loan:
What is your ownership percentage? If the amount of your loan is close to the current value of your property, you probably have little equity that would allow you to refinance. It is important to note that most of the lenders demand a minimum equity of 1520%.
What are closing costs? The amount of the closing costs generally ranges between one and two percent of the loan amount. Find out whether lower interest costs will be sufficient to compensate for these fees in the long run.
Can you sign up for better conditions of the loans? If you have a better credit standing than when you applied for the home equity loan, try to lock in a better interest rate or better yet, aim for a more favorable loan type such as a HELOC.
Do you have any intention of changing your residence soon or are you thinking of doing so in the near future? The closing cost takes time to be recovered and therefore, refinancing may not be worthwhile if one plans to move within the next few years.
What will be the new payment per month? Ensure that you are okay with the possibility of higher monthly payments if your refi reduces the repayment period.
Conclusion It may make sense to refinance a home equity loan or line of credit if you are interested in reducing your interest rate, taking out more equity, changing the repayment schedule, or converting your HELOC into a fixed-rate loan. However, costs incurred on closing can be high thus it is advisable to consider the costs keenly. Besides,; one needs to have enough home equity and good credit scores to refinance. Consult with loan officers to discuss your particular circumstances and decide whether refinancing is financially beneficial for you.
