{"id":12550,"date":"2010-03-28T12:54:03","date_gmt":"2010-03-28T18:54:03","guid":{"rendered":"http:\/\/template.lenderama.com\/?p=740"},"modified":"2010-03-28T12:54:03","modified_gmt":"2010-03-28T18:54:03","slug":"should-i-refinance-or-get-a-home-equity-line-in-order-to-do-home-improvements","status":"publish","type":"post","link":"https:\/\/dev203k.orbitwebx.com\/dev203k\/should-i-refinance-or-get-a-home-equity-line-in-order-to-do-home-improvements\/","title":{"rendered":"Should I Refinance or Get a HELOC For Home Improvements?"},"content":{"rendered":"

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Here is an important question to consider: Should I Refinance or Get a HELOC For Home Improvements?<\/p>\n

For homeowners interested in making some property improvements without tapping into their savings or investment accounts, the two main options are to either take out a Home Equity Line of Credit <\/a>(HELOC), or do a cash-out refinance.<\/p>\n

According To Wikipedia<\/a>:<\/strong><\/p>\n

A home equity line of credit<\/strong> is a loan in which the lender agrees to lend a maximum amount within an agreed period, where the collateral is the borrower’s equity.<\/p>\n

A HELOC differs from a conventional home equity loan<\/a> in that the borrower is not advanced the entire sum up front, but uses a line of credit to borrow sums that total no more than the credit limit, similar to a credit card.<\/p>\n

HELOC funds can be borrowed during the “draw period” (typically 5 to 25 years). Repayment is of the amount drawn plus interest.<\/p>\n

A HELOC may have a minimum monthly payment requirement (often “interest only”); however, the debtor may make a repayment of any amount so long as it is greater than the minimum payment (but less than the total outstanding).<\/p>\n

Another important difference from a conventional loan is that the interest rate on a HELOC is variable. The interest rate is generally based on an index, such as the prime rate<\/a>. This means that the interest rate can change over time. Homeowners shopping for a HELOC must be aware that not all lenders calculate the margin<\/a> the same way. The margin is the difference between the prime rate and the interest rate the borrower will actually pay.<\/p><\/blockquote>\n

A Home Equity Loan is similar to the Line of Credit, except there is a lump sum given to the borrower at the time of funding and the payment terms are generally fixed. Both a Line of Credit\u00a0and Home Equity Loan\u00a0hold a subordinate position to the first loan on title, and are typically referred to as a “Second Mortgage”. Since second mortgages are paid after the first lien holder in the\u00a0event of default foreclosure or short sale, interest rates are higher in order to justify the risk and attract investors.<\/p>\n

Measuring The Different Between HELOC vs Cash-Out Refinance<\/a>:<\/strong><\/h2>\n

There are three variables to consider when answering this question:<\/strong><\/p>\n

1.\u00a0 Timeline
\n2.\u00a0 Costs or Fees to obtain the loan
\n3.\u00a0 Interest Rate<\/p>\n

1. Timeline – <\/strong><\/p>\n

This is a key\u00a0factor to look at first, and arguably the most important. Before you look at the interest rates, you need to consider your time line or the\u00a0length of time you’ll be keeping your home.\u00a0 This\u00a0will determine how long of a period you’ll need in order to pay back the borrowed money.<\/p>\n

Are you looking to finally make those dreaded deferred home improvements in order to sell at top dollar?\u00a0Or, are you adding that bedroom and family room addition that will finally turn your cozy bungalow into your glorious palace?<\/p>\n

This is a very important question to ask because the two types of loans will achieve the same result \u2013 CASH — but they each serve different and distinct purposes.<\/p>\n

A home equity line of credit, commonly called a HELOC, is better suited for short term goals and typically involves adjustable rates that can change monthly. The HELOC will often come with a tempting feature of interest only on the monthly payment resulting in a temporary lower payment. But, perhaps the largest risk of a HELOC can be the varying interest rate from month to month. You may have a low payment today, but can you afford a higher one tomorrow?<\/p>\n

Alternatively, a cash-out refinance of your mortgage may be better suited for securing long term financing, especially if the new payment is lower than the new first and second mortgage, should you choose a HELOC. Refinancing into one new low rate can lower your risk of payment fluctuation over time.<\/p>\n

2. Costs \/ Fees – <\/strong><\/a><\/p>\n

What are the closing costs for each loan?\u00a0 This also\u00a0goes hand-in-hand with the above time line considerations. Both loans have charges associated with them, however, a HELOC will typically cost less than a full refinance.<\/p>\n

It’s important to compare the short-term closing costs with the long-term total of monthly payments.\u00a0 Keep in mind the risk factors associated with an adjustable rate line of credit.<\/p>\n

3. Interest Rate – <\/strong><\/a><\/p>\n

The first thing most borrowers look at is the interest rate.\u00a0Everyone wants to\u00a0feel that they’ve\u00a0locked in the lowest rate possible.\u00a0The reality is, for home improvements, the interest rate may not be as important as the consideration of the risk level that you are accepting.<\/p>\n

If your current loan is at 4.875%, and you only need the money for 4-6 months until you get your bonus, it’s not as important if\u00a0the HELOC rate is 5%, 8%, or even 10%. This is because the\u00a0majority of your mortgage debt is still\u00a0fixed at 4.875%.<\/p>\n

Conversely, if you need the money for long term and your current loan is at 4.875%, it may not make financial sense to pass up an offer on a blended rate of 5.75%\u00a0with a new\u00a0\u00a030-year fixed mortgage.\u00a0\u00a0There\u00a0would\u00a0be a considerable\u00a0savings\u00a0over several years if variable interest rates went up for a long period of time.<\/p>\n

…..<\/p>\n

Choosing between a full refinance and a HELOC basically depends on the level of risk you are willing to accept over the period of time that you need money.<\/p>\n

A simple spreadsheet comparing all of the costs and payments associated with both options will help highlight the total net benefit<\/a>.<\/p>\n

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Related Article – Refinance Process:<\/h2>\n