Summer is just around the corner and it’s prime home-buying time. However, not everyone is in the market to buy. If you’re happy with your current home, you can still take advantage of some of the lowest mortgage rates we’ve seen by refinancing your mortgage. There are three main reasons to refinance your home: to save money, to borrow cash against your equity, or to do a combination of the two.

Refinance to Save

If you’re trying to save money by reducing your monthly payments, you need to divide cost of getting the loan by the monthly payment savings. This will tell you how many months it will take for you to “break even” and start saving money. If you plan on staying in the home past the time frame shown, you should refinance. Here’s a good rule to follow:

If the “break even” point is…

Under 3 years: Good time to refinance

3 to 5 years: Consider options carefully

5 years or more: Best to wait and refinance later

If your overall goal is to refinance to a shorter term loan (for instance going from 30 to a 15-year mortgage) to pay your house off faster, be sure the rate is dropping enough to recover the costs as if the refinance was a 30-year loan. If it doesn’t, you should just start pre-paying principle on your current loan at the 15-year payment amount instead of refinancing and paying costs.

Refinance for Cash

You can get cash for any purpose you want: home improvements, pay off debts, family needs – there are no restrictions based upon how the cash will be used. The common 30-year fixed first mortgage allows you to borrow up to 80% of the appraised value for the refinance loan amount.

The two other ways people choose to borrow cash are with a Home Equity Line of Credit (HELOC) or a Home Equity Loan.

Home Equity Line of Credit (HELOC)

A HELOC is a revolving line of credit that allows borrowers to obtain a predetermined amount of money drawn against the equity of their home. (Think of it as a “credit card” secured by a mortgage or deed of trust on the property). Borrowers will be approved for a specific amount of credit (their credit limit), which is the maximum amount of money they can borrow at one time. The credit limit is normally set by the lender based on a percentage of the home’s appraised value and subtracting that from the balance still owed on the first mortgage. Additional factors will also be used to determine a credit limit such as: income, debts, credit history and ability to make payments. HELOC funds can be accessed by special checks or a credit card.

Many HELOC plans have fixed periods known as “draw” and “repayment” periods – which can vary in length. During the draw period the borrower is able to borrow money and may have smaller monthly payments or interest-only payments. Some plans call for payment in full by the end of the draw period; other plans that use a repayment period ask that the money be paid over that fixed amount of time, or may have a repayment period and balloon payment at the end.

A HELOC is good for borrowers who desire a lower up-front rate and access to money at unpredictable times. Borrowers will only need to pay back the amount of money that is actually used from the line of credit and they only face credit reviews on a 1 to 3 year basis. Competition among lenders has encouraged the growth of introductory “teaser” rates and other incentives.

Home Equity Loan

A Home Equity Loan is an example of a second mortgage. Borrowers receive a check for the entire loan amount and will need to make payments on the loan until it’s paid off.

Home Equity Loans are a good choice for borrowers who need a specific amount of money and payment stability. These are fixed rate loans which allow borrowers to lock-in the interest rate for the entire life of the loan. Unlike a HELOC, there are no annual (or “maintenance”) fees associated with this type of loan.

Note: The combined mortgage along with either the HELOC or Home Equity Loan typically cannot exceed 80% of the current value of the home. 

Forrit Credit Union
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