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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
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
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
- Interest Rates on a Home Equity Credit
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
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.