Mortgage Home Equity Refinance: Mortgage Refinance Procedures Clarified

Home Equity Refinance The Smart Way

Home Equity Refinancing Loans or Home Equity Lines of Credit attract low interest rates and even be tax deductible. For this reason it can be a smart way to go about borrowing money. As always it should be remembered that these loans are secured on the home itself and any payment default can develop into a serious issue even ending in foreclosure.

Legitimate reasons for borrowing against the home equity would be for renovation, such as for a kitchen or bathroom and also for children's education. By using a home equity refinance loan package to pay off outstanding debts on credit and store cards is an extremely wise move as the interest rate could be less than half. Consolidating these types of unsecured debts will save a lot of money.

Of course, the money can only be saved provided that sensible spending is followed. Paying off credit cards and then running up more unsecured debts is a recipe for disaster.

Choosing Between a Home Equity Refinance Loan and a Home Equity Line Of Credit

A Home Equity Refinance Loan has a fixed interest rate for set term. The loan amount is received in full as a lump sum. This is useful for any big expense such as a costly renovation bill or clearing credit card and store card unsecured debts in one go. So, for home renovation or credit card debt consolidation the Home Equity Refinance Loan is a good option.

A Home Equity Line of Credit, (abbr. HELOC), requires some financial discipline. The borrower is given a pre-approved credit limit and there is the ability to use as much or as little credit as the borrower wishes to use. Interest is only charged on the used credit, not the full credit limit, but this type of borrowing usually requires a slightly higher interest repayment rate. The HELOC is advantageous if relatively small amounts of funding are required over a long period of time as may be the case with an ongoing renovation plan rather a one time fix.

It can be the case that the repayments required are for the monthly interest accrued only which means that a lower cost is involved during the interest only period but it must be remembered that the principal is still outstanding. After the interest only period has run it's course the borrower will be required to make a balloon payment, that is to pay off the entire balance of the HELOC or they have to begin paying back the principal which means the loan payments will increase. It is always a good idea with this type of credit line to pay back more than the minimum required every month so as to reduce the principal as much as possible.

The 'Loan to Value' LTV Ratio

Broadly speaking people can generally borrow up to 80% of the property's current market value minus the amount outstanding on the home loan. This is the LTV. Some lenders will try to tempt borrowers with a high LTV, sometimes as much as 125% of the home equity, but this can cause problems if a family has to suddenly relocate for any reason. A situation could arise where the proceeds of the property sale are insufficient to clear the mortgage and an outstanding home equity refinance loan. Staying within a LTV of less than 80% is good advice to avoid such problems that may occur at a later date.

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