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Refinancing and Home Equity
Should you refinance, and when? And when does it make sense to take out a home equity loan in order to finance an addition, or to consolidate debts into a lower payment? When might it make sense for you to consider a reverse mortgage.

Refinancing Can Mean Big Savings
Whenever interest rates drop, as they sometimes do when Alan Greenspan gets a little out of hand, homeowners might have the opportunity to save money. Lower interest rates generally translate into lower mortgage loan rates, and refinancing your mortgage at a lower rate can save you a few bucks on every monthly payment.

Deciding whether to refinance your home comes down to a basic calculation: Will your savings from reduced mortgage payments be greater than the up-front costs? Therein lie the guts of the refinancing decision.

- A Home Equity Credit Line
One way to borrow against the value of your home is a home equity line of credit, which is a form of revolving credit in which your home serves as collateral. With a home equity line, you will be approved for a specific amount of credit -- your credit limit -- meaning the maximum amount you can borrow at any one time while you have the plan.

In determining your actual credit line, the lender also will consider your ability to repay, by looking at your income, debts, and other financial obligations, as well as your credit history.

Home equity plans often set a fixed time during which you can borrow money, such as 10 years. When this period is up, the plan might allow you to renew the credit line. In addition, some plans might call for payment in full of any outstanding balance. Others might permit you to repay over a fixed time, for example 10 years.

- Costs of a Home Equity Credit Line
Many of the costs in setting up a home equity line of credit are similar to those you pay when you buy a home. These costs include:
A fee for a property appraisal, which estimates the value of your home.
An application fee, which may not be refundable if you are turned down for credit.
Up-front charges, such as one or more points (one point equals one percent of the credit limit).

- Interest Rates on a Home Equity Credit
Home equity plans typically involve variable interest rates rather than fixed ones. A variable rate must be based on a publicly available index, such as the prime rate published in some major daily newspapers, or a U.S. Treasury Bill rate. The interest rate will change, mirroring fluctuations in the index.

To figure the interest rate that you will pay, most lenders add a margin, such as two percentage points, to the index value. Because the cost of borrowing is tied directly to the index rate, it is important to find out what index and margin each lender uses, how often the index changes, and how high it has risen in the past.

- Repaying Your Home Equity Credit Line
Before entering into a plan, consider how you will pay back any money you borrow. Some plans set minimum payments that cover a portion of the principal (the amount you borrow) plus accrued interest. But unlike the typical installment loan, the portion that goes toward principal may not be enough to repay the debt by the end of the term. Other plans may allow payments of interest alone during the life of the plan, which means that you pay nothing toward the principal. If you borrow $10,000, you will owe that entire sum when the plan ends.

Regardless of the minimum payment required, you can pay more than the minimum and many lenders may give you a choice of payment options. Consumers often will choose to pay down the principal regularly as they do with other loans.

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