Refinancing vs Line of Credit
Refinancing vs line of credit are two popular options available to you when deciding the best way to take equity out of your home. So who should establish a line of credit rather than get a cash back refinance mortgage loan?
It really boils down to doing some simple math to find out which loan is best for your situation. The amount of money you need to borrow and for how long really determines if refinancing vs line of credit loan makes the most sense.
Home equity lines of credit are based on an adjustable type mortgage rate and move up or down when the Fed raises or lowers the prime rate.
If you don't need to borrow much money and plan to pay off the loan in a short amount of time, an equity line of credit may work best for you.
An advantage of a home equity credit line is banks offer their lowest interest rates on adjustable mortgage rate type loans. Also, equity lines of credit usually come without closing costs typical of a cash back refinance mortgage loan.
Average closing costs on a refinance loan usually amount to several thousands of dollars. So when you are trying to decide between refinancing vs line of credit that should factor into your decision.
Another advantage of a home equity credit line is they offer you more flexibility than a cash back refinance mortgage loan. With a home equity credit line you only pay interest on the amount you borrow. The rest of the credit line amount is available at any time without you paying any interest.
A home equity credit line works well for smaller loan amounts, but if you need a large amount of money, ($75,000 to $100,000) you may want to consider a cash back refinance mortgage loan.
A cash back refinance mortgage loan is a first mortgage and most have 30 year amortization schedules that keep your payments more affordable on larger loan amounts. Most home equity lines amortize over 10 years or 15 years because they are considered a second mortgage loan.
Another consideration when trying to decide between refinancing vs line of credit is the interest rate you currently have on your first mortgage. If you have a low interest rate on your first mortgage you may want to take advantage of a home equity credit line so you can keep the low rate on your first mortgage.
If you have a high interest rate on your first mortgage, a cash back refinance mortgage loan with a lower interest rate might work best. Just remember to consider that average closing costs on a refinance loan amount to several thousands of dollars.
Until you repay those loan and closing costs you won't be saving any money even if your monthly payment is lower. Figure the number of months it takes in payment savings to cover the typical closing costs of a cash back refinance mortgage loan to see if this makes sense for you.
These tips should help when deciding if you should establish a line of credit or get a cash back refinance mortgage loan. Do the math to find out if refinancing vs line of credit makes the most sense for your situation.
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