Mortgage Refinance or Home Equity Loan?

By Kelly Richardson Columnist

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If you're looking to cash out some of the equity in your home, do you know how best to accomplish that goal? You could refinance. Home equity loans are also an option. But choosing the best option for you depends on your financial situation and lifestyle.

Home equity is one of your most powerful financial assets. Buy a modestly priced home in an up-and-coming neighborhood, and you'll be surprised at how fast equity can build up. When it comes time to get some of that money for consolidating debts or paying for your kid's tuition, whether you refinance your home or draw on a home equity line of credit depends upon a variety of factors.

General Guidelines

  • » When to Refinance. In most cases, refinancing your first mortgage should only be done when you're cashing in equity and you can get more favorable terms (like a better rate) than you have with your current mortgage. The closing costs associated with cash-out refinancing can be steep.
  • » When to go HELOC. If you only need your loan for a short time, home equity lines are the way to go. Avoid major closing costs and keep your borrowing on a schedule. HELOC loans can be advantageous because you only pay interest on the amount drawn on--they function like a credit card; you can draw funds and repay them when needed. HELOCs can also be a hedge against a financial emergency--available if you need it, and costing very little if you don't.
  • » Good to Know. For a cash-out refinance, most lenders require you to have at least 5% equity accumulated in the property in order to complete the transaction, and in general the more equity you have the better your rate.
As with any financial deal, always consult your lending officer for an explanation of the terms and conditions of mortgage refinancing or home equity loans. They'll be able to provide custom advice for your needs.

About the Author
Kelly Richardson covers the real estate scene in major cities across the country. His articles appear in educational journals, periodicals, and e-zines.

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