Many homeowners in the United States were cut off from one of the most popular sources of funds during the recent housing bust, the equity in their homes. As home prices begin to recover however, many have started to once again Into their home’s equity in order to do things like consolidate their debt, pay for home renovations and also pay for other “big ticket” items that they need.
In fact, over the last 12 months, there was a 27% spike in home equity lines of credit according to Experian, the financial services company, and experts predict that many more people will soon be following that lead.
That being said, there are 5 factors you need to consider before taking out a home equity loan (HEL) or a home equity line of credit (HELOC) or refinancing, to determine if it is really the best financial choice you can make. Those 5 factor are below. Enjoy.
Factor 1) Rates. In the last few years almost 9 million borrowers got 30 year fixed mortgage loans at the rate of 4% or lower due to the fact that mortgage rates were at near historic lows. Now however, those same rates are expected to increase. Keith Gumbinger, who represents mortgage information firm HSH.com, says that “we may be in for a more volatile period,” and he’s probably right, when you consider that the Federal Reserve is ending a number of programs that they had in place to keep rates low under their quantitative easing monetary policy.
Factor 2) Costs. Simply put, if you get a home equity loan or HELOC, the price that you’ll pay up front is going to be cheaper than if you refinance. That’s because when you refinance most lenders will force you to go through the entire underwriting process and, when you do, they hit you with all sorts of fees at the same time.
Those include attorney review fees and inspection fees for example, along with having to get new insurance and a new title search. Typically this can cost you over $1000 or more, depending on your mortgage of course and, in the end, the cost of refinancing could actually increase to $2000 or $3000.
On a home equity loan or line of credit many lenders don’t have any upfront costs, however the higher interest rate that you pay will cover the application, appraisal and any other fees.
Factor 3) Time. When you refinance a loan the clock “resets” but, when you take out a home equity loan or a HELOC, the payments you make are made on the same schedule.
If, for example, you’ve paid 60 months on a 30 year loan and then you decide to refinance, it will be as if you just started at day 1 again with your 30 year term. You could roll the 30 year loan into a 15 year loan, which would reduce the number of payments but would increase the cost of each monthly payment instead.
Factor 4) The reason that you need the loan or credit line. Most financial experts will tell you that the best reason to get a home equity loan is that it will positively impact your finances. If you use it to renovate your property, adding value to said property, or to go back to school and advance your degree, a home equity loan makes sense.
On the other hand, if you use your home’s equity to purchase a sports car or take a luxury vacation, that money will soon be gone but, unfortunately, the debt won’t, and you’ll be paying it off for quite a few years into the future.
Factor 5) Tax benefits. When you get a cash-out refinance you might not get any tax benefits but, just like your first mortgage, many home equity loans and HELOC’s allow you to deduct up to $100,000 of the principal on your mortgage in interest paid.
And there you have it. 5 Factors that need to be seriously considered before using the equity in your home to get any money that you might need. If you have questions about refinancing or getting a home equity loan, please let us know by sending us an email or leaving a comment. Thank you.