Home Equity Loans Versus First Mortgage Refinancing for Debt Consolidating
Smart Home Equity examines equity loans and second mortgages vs. refinancing when consolidating debt for finding fixed rate monthly savings.
Like many consumers, you may find yourself in more debt than what is financially comfortable. You may be considering refinancing to avoid the high costs and complications of bankruptcy under the new laws. Whatever the reason, you need to do the math for your particular circumstances before deciding whether to refinance your current 1st mortgage or consider home equity loans (second mortgages) for consolidating your debts.
If you bought your house at a time when interest rates were higher or your credit is better now than it was when you first bought your house, refinancing may be a great way to save money, lower your mortgage payments and consolidate nagging debts. On the other hand, "if you've got a favorable rate on a first trust deed mortgage, something in the 6s thereabouts or low 7s, you don't want to pay off a $100,000 mortgage to take out $20,000 and raise the rate on the whole amount," said Richard West, senior vice president and division manager at San Francisco-based Union Bank of California Corp. "You're much better off borrowing $20,000 and keeping the first mortgage.
The only thing to be on the lookout for with home equity loans and lines of credit is additional closing costs. Some lenders may agree to waive costs on 2nd mortgages because there are fewer closing and underwriting steps required than for first mortgages. But others may charge almost as much in closing costs and fees for second mortgage loans as they would for a loan in the first-lien position.
The decision-making process doesn't end with determining whether you'll refinance or take a second mortgage. There are other considerations including whether you want a fixed or adjustable rate loan or if an interest only loan is better for your current financial circumstances. In recent times, many attractive adjustable rate mortgage (ARM) options have been introduced and have gained popularity. Considering that the average homeowner sells his/her house in 7-1/2 years, refinancing into a 10-year ARM may end up saving you a lot more money than going for a 30-year fixed.
Although the 30-year fixed rate mortgage provides piece of mind in knowing that interest rates won't raise, you won't be saving money if you sell you house in 5 to 7 years. So, remember to also consider how long you plan on staying in the home before making the final decision. And, most importantly, do the math. That's the only way you'll be able to determine which loan best suits your debt consolidation needs.