Refinance Mortgage Or Home Equity Loan?

Added January 19, 2009 by Ilyce R. Glink

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Summary: Which is the better option for you - refinancing your mortgage or getting a home equity loan to pay off the mortgage entirely? The decision on whether to refinance your mortgage or get a home equity loan depends on how soon you plan to pay off your loan. Home equity loans can be structured as fixed rate loans or fully-amortized loans which may help you pay off the loan faster than refinancing your mortgage at a fixed rate for a longer period of time.

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.

Q: I bought a home a little more than 6 months ago. This week, I lost my job. I'm wondering if I can refinance the mortgage now and lower our payments.

A: Without a regular source of income, like a full-time job, you will have a difficult time refinancing your existing loan or even getting a home equity loan or line of credit.

Hopefully, you will be able to find full-time work soon, before your jobless benefits run out, so that you can continue to make your mortgage payments on time. You need to keep paying all of your bills on time so that you maintain an excellent credit history and high credit score.

Having good credit means that the moment you do have a full-time job, you can take advantage of the current low interest rates and refinance or take out a home equity loan or line of credit.

Good luck with your job search.

Q: My condo is located in Bellevue, Washington. I want to sell it but the neighbor upstairs practices piano daily. (She is into classical music.)

Does the law require me to tell my real estate agent about this practice? I think that this information wouldn't help me sell quickly.

A: The fact that your neighbor plays piano regularly shouldn't be something that you discuss unless you're asked about it directly. If you are asked about it, you should answer honestly.

However, whether or not you think your neighbor is a musical genius or nightmare, shouldn't be a part of the discussion. Just because the music drives you crazy doesn't mean it won't affect someone else differently.

You never know. Perhaps the future buyer will be a classical violinist and the two of them will make beautiful music together!

Jan. 19, 2009.

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