Borrowing from your home is a good way to pay off large expenses or renovation projects. Can home equity loans be refinanced?
Home equity loans
Home loans tend to have lower interest rates than personal, unsecured loans because they are secured by your property, but there is a catch: the lender can come after your home if you do not comply with the conditions. a traditional home loan in which you borrow a lump sum and a home loan line (HELOC).
HELOC is like a credit card linked to equity in your home. For a limited time after receiving it, known as the drawing period, you can generally borrow as little or more of this credit line as you like, although some loans require an initial withdrawal of a certain amount. You may need to pay a transaction fee each time you withdraw or inactivity fees if you do not use your credit line at any time within a specified time. During the draw, you only pay interest on what you borrow. When the drawing period ends, the credit line also ends. You start paying off the principal and interest when the repayment period begins.
A traditional home mortgage loan is often called a second mortgage. You have your basic mortgage and now you have a second loan for equity built in the property. The second loan is subordinated to the first – in the event of default, the second lender stands behind the first to collect any foreclosure proceeds. For this reason, the mortgage interest rate is usually higher. The lender takes more risk. HELOC are also sometimes called second mortgages.
Reasons for refinancing a housing loan
Refinancing a home loan is usually a good idea if you have accumulated significant equity in your home or if you want to take advantage of low interest rates. Here is a list of common reasons for refinancing a home loan:
- Get a lower interest rate.
- Convert from a loan with a floating rate to a loan with a fixed interest rate.
- Get a short-term loan to build new capital faster.
- Avoid ballooning.
- Get more cash out of equity.
When not to refinance the equity loan
Don’t forget to look at all the options. In 2016, HELS had low interest rates, but be sure to check all refinancing options. Although home loans offer potential tax and cost benefits, compare these benefits and HEL rates with traditional refinancing rates or cash withdrawals.
In addition, home loans are not beneficial for small expenses. A 15-year home loan can reduce your monthly costs, but using it to cover small or short-term expenses usually means you ultimately pay more interest.
