When you first purchased your home, the costs were paid up front, either by you or the seller. When you refinance, you have a choice of paying the expenses or financing them into the new loan. Keep in mind, by financing the closing costs you are increasing your loan balance. By increasing your loan balance, you may find that the monthly payment is higher or it may take you longer to pay off the loan. You want to refinance only if you can foresee the benefit and recover the expense within 12 to 18 months. Any longer recuperation means the money spent to refinance will be recovered.
If you are looking for an inexpensive means to access quick cash from your home, you might explore a home equity loan or home equity line of credit (HELOC). Many individuals find that a second mortgage or home equity loan accomplishes the same goals that can be reached by refinancing, at a lower cost. If you decide a home equity loan is a better alternative, keep in mind that there are several options available and take an organized approach to equity loan shopping.
So, what is the difference between a home equity loan and a HELOC?
A home equity loan is much like a typical mortgage. You will borrow a lump sum and pay it back in monthly installments. The interest rate may remain fixed until the loan is paid in full. The HELOC functions like a credit card, or line of credit, with a variable interest rate. You may borrow as much as desired and whenever the need arises.
People borrow against their home’s equity for numerous reasons. The most common reasons are to pay for home improvements and to consolidate debt. Others may use the equity to pay for big-ticket purchases, college tuition or medical expenses.
Closing costs and rates vary upon what kind of home equity loan or refinance you choose. With a home equity product, you may find that the interest rates are a little higher compared to a refinance, but you can usually find a product with little or no closing costs. Study the pros and cons of each product you explore.
