Refinancing or Home Equity–What is the better choice?
Question: Can someone please explain me what would be the better choice refinancing or home equity lona in getting money from my current home? What are the tax advantages or disadvantages of these methods. What would be the cheapest way to go with?
Answer: Tax advantages null out. There’s really no difference among the two because, generally, all interest paid against loans on your primary residence (first mortgage and home equity) are deductible.
If what you want is to cash out your equity, the answer lies in these numbers: the interest rate you have your current first mortgage at (generally a fixed rate)
the interest rate you acan get home equity loan or line of credit at (generally a variable rate)
what your crystal ball says about future mortgage rates, and your tolerance for the risk that they are likely, historically speaking to go up before they go back lower
how much cash you need, and for how long
how long you plan to be in your current residence
So, for example, say you have a short term need for a big chunk of money, but you plan to stay in your house for several more years, and have a nice 5.125% rate on your first mortgage. In that case, home equity would generally be a better move here because if you were to refi the first mortage, you’d be looking at a rate of more around 6% that you’d be stuck with potentially for the rest of the time you’re in the home. And even if a home equity line was 7.25%, your need for the cash is short term, so you’re likely to pay less total interest if you stick with your first mortage, and go with a home equity line or loan for the short duration.
If however, you’ll need the money for a long time, or if your current mortgage rate isn’t that hot, a cash out refi may make more sense. It all comes down to your specific numbers.
Also, as others have pointed out, closing costs on afirst mortgage are generally higher than for home equity, so be sure to add that in, in addition to the “total interest paid” calculation.
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Filed under: Home Equity Loan
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