Should Homeowners Consider Refinancing or Home Equity Loans?

Learning about both options will help you make the best decision to save money

6/4/2014 10:00:00 AM
Homeowners may have steep mortgages due to investments they made when interest rates were higher than they are today. While many property owners want to reduce their expenses, refinancing and home equity loans are just two of the options available to help these people.
How does refinancing work?
Lower mortgage rates will result in lower monthly payments for homeowners. Refinancing a home delivers instant benefits to many property owners by allowing them to noticeably reduce their monthly expenses.
Homeowners can refinance their mortgages to take advantage of favorable interest rates and improve their credit scores. In addition, lower interest rates can help property owners build equity in their residences quickly.
With refinancing, homeowners have two available options: reducing or increasing the length of their current mortgages. By agreeing to a shorter mortgage, property owners will make higher monthly payments. Conversely, a longer mortgage means lower monthly payments for homeowners.
Refinancing is a great way for property owners to save money, but this option can be challenging for some people. If homeowners have been paying off their mortgages for years, most of their monthly payments could be credited to paying interest again and not to building equity.
A prepayment penalty also makes it difficult for some homeowners to refinance. This fee should be a major consideration for property owners because it can increase the amount of time it will take to break even, especially if these people account for the costs of the refinance and the monthly savings they expect to gain. However, refinancing with the same lender could help homeowners get a prepayment penalty waived.
How does a home equity loan work?

Commonly referred to as a second mortgage, a home equity loan enables homeowners to borrow money by leveraging the equity in their residences. These allowances typically range between five and 15 years, and two types are available: 
  1. Fixed-rate loans. With fixed-rate loans, homeowners will receive a single lump-sum payment that must be repaid over a set period of time at an agreed-upon interest rate. Fixed-rate loans can help homeowners receive immediate financial support, and the payment and interest rate remain the same over the life of the allowance.
  2. Home equity lines of credit. A home equity line of credit is similar to using a credit card and allows people to withdraw money at any time. Many financial institutions provide credit cards or special checks to participants, and monthly payments vary based on the amount of money borrowed and the current interest rate. At the end of the loan, the outstanding loan amount must be paid in full. 
Homeowners should consider the long-term value provided by refinancing and home equity loans. Both of these options have their pros and cons, and extensive research can help property owners make informed decisions that can help them save money for years.

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