Refinancing Equity Loan

Many home owners make the mistake of using credit cards for long-term debt when a home equity loan could provide much needed cash at a much better interest rate. Additionally, a refinancing equity loan can help homeowners out of a credit card debt situation that already exists.

For those who don’t understand the concept, equity is the difference between how much you owe on your original mortgage and the value of your home. This difference can be used as collateral for a new loan, often called a second mortgage, or a refinancing equity loan. Collateral is a guarantee that you will repay the loan. If you default on the loan, the lender can use the collateral to collect the money that you owe them. This makes lenders much more comfortable in approving a loan. A refinancing home equity loan pays the borrower a lump-sum payment in the amount of the equity of a home. This money can be used as the borrower wishes.

People get home equity loans for different reasons. Some people use the money for home improvement or repairs. One type of popular improvement is to make a home energy efficient. Not only will this save money in the long-term, it could also afford several income tax advantages. It could also be used to pay the expenses of higher education or fund private schooling for the kids. Other reasons for taking out a second mortgage include paying off credit card debt and consolidating other debt to improve the homeowner’s financial situation and credit rating. Many people use a refinancing equity loan to improve bad qualities of their first mortgage. A low-interest, fixed-rate second mortgage could save money in the long term by using the money to help pay off an adjustable-rate first mortgage. It can also be used to avoid an upcoming large balloon payment that would otherwise be unaffordable.

Refinancing equity loans are very popular and are a good choice for quick cash because, unlike other types of consumer debt, the interest is tax-deductable up to an amount of $100,000. Another situation in which refinancing can be beneficial is when property values have greatly increased over the amount originally owed on the home. When this happens, homeowners have an option of taking a cash-out refinancing. This is when a new mortgage is written for the new value of the home. The original mortgage is paid off and the difference is pocketed as cash.

When applying for a refinancing equity loan, lenders look at three different factors: loan-to-value ratio, income, and credit history. Credit history is the baseline factor for extending any kind of credit or approving a loan. Even if you have equity for collateral, a bad credit score could easily disqualify a person for a home equity loan. Income is important because the lender has to know that you have the financial strength to make the monthly payments on the loan. It is not only gross income that is important. Lenders look at current expenses to determine your available income. Loan-to-value ratio (LTV) is important because the lender needs collateral on the loan. Lenders also like to keep the LTV ratio at 80% or less.

People taking out a refinancing equity loan must also be aware of the fees associated with the loan. The total fees for taking out the loan can be as high as 5% of the loan. Common fees for a second mortgage include application fees, document preparation, property appraisal, and attorney fees.