Are There Alternatives to Refinancing?

Are There Alternatives to Refinancing?
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Using Home Equity

For many people, their home is their most valuable asset. For those who have equity built up in their homes, there is a great opportunity to use that equity to put an addition on their homes, have extensive remodeling done or simply take out cash to pay off credit card debt or make an investment. Another possibility is to tap into your equity to buy out a co-owner of your home (provided you do not have an outstanding mortgage with their name on it). In these instances, refinancing a home may not be the best possible alternative for using home equity. There are other more flexible methods that are viable alternatives to refinancing such as a home equity line or a second mortgage. Understanding both of these refinancing alternatives will help you make a decision that works best for you and for your family. In general, a straight refinancing of your home will cost you more money than either a second mortgage or an equity line. An equity line also has some benefits which should be explored when you are considering how to make use of the equity in your home.

Understanding Second Mortgages

If you have a mortgage on your home and you are considering a second mortgage for the purposes of remodeling, paying off other debt or for other legal purposes, you may be considering a second mortgage in lieu of a refinance. One of the reasons that a second mortgage can be appealing is if you have a low interest rate on your first mortgage, or if your first mortgage is nearly paid off, it may not make sense to refinance.

A second mortgage loan (commonly called a home equity loan) generally runs for less than the term of a first mortgage. While a first mortgage may be available for twenty or thirty years, a second mortgage is likely to be for ten or fifteen years with the full balance due on a specific date. Some second mortgage loans require monthly payments while others are “balloon” loans that come due at the end of the term. In general, a second mortgage loan interest rate is higher than a first mortgage and almost always higher than a home equity line of credit.

Understanding Home Equity Lines of Credit

Although a home equity line of credit is also considered a second mortgage, there are benefits that are not available with a second mortgage. While a second mortgage is similar in nature to a first mortgage, a home equity line of credit is a loan that has a “final” date that you may use the line of credit for any purposes that you choose.

A home equity line of credit works much like your credits cards do. Rather than having a one time lump sum payment to you as you would get after a second mortgage (or a refinance of your first mortgage), you have access to a specific amount of money over a set period of time (depending on the bank’s policies).

Unlike a second mortgage, one word of caution about a home equity line of credit–much like your credit cards, a home equity line of credit may carry an adjustable rate of interest. If you are not confident that you can make your payments on time each month, you can lose your home to foreclosure.

Deciding on Your Best Option

The tax benefits, the overall interest payment and savings you may gain from using either a second mortgage or a home equity line should be considered carefully before you decide which of these alternatives to refinancing will work for you. It’s often wise to seek the assistance of your accountant or a real estate attorney before deciding to take on additional debt that may put your home in jeopardy.

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