Home Equity Loan versus Refinancing Mortgage Costs
Question: Why is it that the home equity loans that I have investigated >involve no lawyers and low costs; while refinancing the mortgage for >the same amount requires lawyers, title searches and the rest?
Answer: Reason 1: when you refi, the original mortgage holder must be paid off in an atomic transaction which includes the new lender taking the first position; the new lender will insist on having first position. This implies, at the least, an escrow process. When you take on a home equity loan, the claim is subordinate to the original mortgage; no escrow is needed. You get the money, they file the papers you signed. The lender cares only that she is protected, not which position in line she ends up in.
Reason 2: Because equity lenders charge interest rates much more favorable to the lender. There’s a _lot_ of money floating around looking for a “fairly secure prime+2%”, in fact, there’s a lot of money which would be perfectly pleased to find a portfolio of protected second mortgages paying prime minus 1%. This is inflation protected money, unlike home mortgages which, even when at variable rates, include caps and maximum increase clauses which make them a far better deal for the homebuyer. Given this greater incentive, equity lenders are willing to be more flexible.
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