Every homeowner reaches a point where extra money might come in handy. A home refinance can provide cash from your equity and, if you’re lucky, a lower rate. In fact, if you get the right deal your payments may be lower. If it’s flexibility you’re after, consider a home equity line of credit. You’ll have the money at your disposal without worrying about paying interest on money you haven’t used.
A home refinance replaces your existing loan with a new one. You can refinance with the same lender or a different one. You fill out a new application in the amount of the existing loan plus any additional funds. Next, you submit supporting documents like tax returns, pay stubs and bank statements. The lender underwrites the loan and, if approved, sends a commitment letter. You request a payoff on your existing loan and schedule a settlement date. Once you sign the documents, some of the money pays your existing loan and any additional money is disbursed to you.
Advantages & Disadvantages
The biggest advantage of a home refinance is getting a lower rate. This can save you hundreds per month and thousands over the life of your loan. You can also get additional cash to satisfy any number of expenses. The disadvantage is that you must take additional funds at the time of closing. Even if you don’t need the extra money for several months, you’ll start paying interest on it right away. Additionally, even at a lower rate, your payments may be higher, depending on the difference in rates and how much additional money you take.
Home Equity Line of Credit
A home equity line of credit allows you to have a credit line of up to 80 percent of the value of your home minus any first mortgages. On a $200,000 home with a $100,000 first mortgage, you can have a credit line of $60,000. You borrow the money as needed and make monthly payments of interest only. When you pay back the principal, you have that money available to you again.
Advantages & Disadvantages
The major advantage of a home equity line of credit is that you can use the money as needed. If you don’t use the money for six months, you won’t pay interest until then. You can pay back the principal when you are ready and can use that money again once you do. The disadvantage is that the rates are often variable with daily rate changes. This means your rate can go up or down without notice. Additionally, if you go too long without paying back the principal, the bank may “term out” your loan, converting it to monthly payments of principal and interest. These payments will be significantly higher than what you were paying before.
Carl Carabelli has been writing in various capacities for more than 15 years. He has utilized his creative writing skills to enhance his other ventures such as financial analysis, copywriting and contributing various articles and opinion pieces. Carabelli earned a bachelor's degree in communications from Seton Hall and has worked in banking, notably commercial lending, since 2001.