Home Equity Loan Or Refinance?
REM # F574
By Ilyce R. Glink
Summary: A writer wonders whether to refinance a loan or get a home equity loan. Illyce explains that it depends on how quickly you plan to pay off your loan.
Q: I presently owe a balance of approximately $48,000 on a home worth $175,000. The mortgage is at 8 percent.
I am debating the viability of refinancing my mortgage or obtain a home equity loan and pay the mortgage off entirely. What is your recommendation?
A: The answer to your question depends on how quickly you plan to pay off your loan. Home equity loans can be structured as variable or fixed-rate loans, with balloon payments or as fully-amortized loans.
If you can pay off your mortgage in the next 5 or 10 years, you will save a tremendous amount of money by refinancing, whether you use a home equity loan or a regular mortgage.
I did a few calculations on the amortization calculator at eloan.com. If you refinance your remaining loan balance for $48,000 at 6 percent, your payment would be $287.78, if you pay off the loan over 30 years.
However, if you shorten the amortization period to 10 years, your payment jumps to $532.90. And if you want to pay off the home equity loan in 5 years, you'll need to pay about $927 each month.
But that may be doable. You didn't disclose the original amount of your mortgage, or when you bought your home, so I made a few assumptions. If the original mortgage was for $125,000 at 8 percent, your payments would have been about $917, or close to what you'd need to pay now get rid of your home loan in 5 years.
I think if you're prepared to pay off your loan in 5 years, and can live with the idea of a variable-rate home equity loan, you could save even more money and perhaps pay off your loan in even less time.
NOTE: This column is distributed by Real Estate Matters Syndicate, PO Box 366, Glencoe, Illinois, 60022. This column may not be resold, reprinted, resyndicated or redistributed without written permission from the publisher.
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