By: Emily Ferreira, Managing EditorA brief note about the difference between mortgage refinance, home equity loans and home equity lines of credit. All three offer interest rates that are generally lower than other forms of credit.
A mortgage refinance is a new loan that is used to partially, fully or more than pay off a preexisting loan. In instances where a refinance amount is more than the original loan amount, the borrower 'pulls' money out of the house and chooses to take a higher monthly payment and have cash available for spending. A mortgage refinance is ideal when a borrower can opt for a more stable (fixed over adjustable) or lower or still relatively low interest rate. In general, borrowers must wait 2 years for a full refinance.
A home equity loan is generally a second or third mortgage on a home. As a borrower has more loans or more debt in the home (less equity), the interest rates will tend to be higher. As opposed to a home equity line of credit, a borrower must decide how much the home equity loan amount will be and take that money immediately (rather than a line of credit) and in full.
A home equity line of credit is an amount that is available for a period of time (i.e. 5 years) and the borrower will pay the interest/payments of the outstanding balance of the credit line only. Many lenders provide 'no fee' home equity lines of credit as the market can be quite competitive for this type of product.
With home equity and refinance mortgage rates around 6.5%, home loan interest rates are now significantly lower than most other forms of credit. With so many homeowners gaining considerable amounts of equity in their homes over the past few years, home equity loans are a great way to help reduce overall debt and monthly loan payments. Applying for a home equity loan now, while interest rates are still reasonably low, can help to save thousands of dollars compared to other forms of credit such as credit cards, with rates around 13 and 14 percent.
Leveraging Home Loan Equity for Debt Consolidation
Leveraging equity in your home is a great option for individuals wanting to pay off credit card or student loan debts, or to make valuable home improvements. An added benefit to lower rates is also consolidating bills. Dealing with one lender and making one payment saves a lot of time, and hassle.
Some additional Benefits associated with Home Equity Loans and Mortgage Refinance:
- Attractive Fixed interest rates - 30-year and home equity rates are still near all-time lows. Borrowers who own their home for more than 2 years and are currently on a variable rate may want to consider locking in a great rate for 10, 15 or 30-years.
- Reduce monthly payments - consolidating higher interest rates into lower interest rates just makes good financial sense. Most individuals can save $50 to $100 each month by simply understanding the options available to them today!
- Tax deductibility - interest on home loans are tax deductible, versus the interest payable on credit cards. By moving credit card debt to a mortgage refinance or small home equity loan or line of credit, you could save hundreds a year.
Most home equity loans or mortgage refinances will save you significantly over the course of several years, and a noticeable amount immediately. Take a look at the chart below and see how much your home can save you each month with an appropriately structured home loan refinance.
|
OPTION #1 |
OPTION #2 |
OPTION#3 |
|
|
|
LOAN AMOUNT |
MONTHLY CREDIT CARD PAYMENT
(13% APR ) |
AUTO LOAN MONTHLY PAYMENT (8% APR ) |
MONTHLY MORTGAGE PAYMENT (6.5% APR ) |
MONTHLY SAVINGS |
60 MONTH SAVINGS |
|
$25,000 |
$270 |
$167 |
$135 |
SAVE UP TO
$135 |
SAVE UP TO $8,100 |
|
$50,000 |
$540 |
$334 |
$270 |
SAVE UP TO
$270 |
SAVE UP TO $16,200 |
|
$100,000 |
$1,083 |
$668 |
$540 |
SAVE UP TO
$543 |
SAVE UP TO $32,580 |
The table above provides an example of costs associated with three different types of loans - credit cards, auto loans and a home mortgage refinance loan. Over a 5-year period of time, you save thousands by consolidating today.
Note that leveraging home equity for debt consolidation is only appropriate if monthly loan payments can be made. Repayment schedule is not tightly enforced, and homeowners can easily fall behind on their payments and potentially put their homes at risk.
