Financing and Borrowing Against Your Property

If you think that once the mortgage payment is calculated that your only other financial concern is making the monthly mortgage payment, you are mistaken. There may be times when it is at advantageous to refinance your home. In addition, you may borrow against the equity that you have built up in the property.

Refinancing

What happens, if, after you have purchased a home, more favorable financial terms become available? For example, assume that you thought interest rates would go higher after you purchased your home, so you opted for a fixed-rate mortgage. Since then, however, interest rates for comparable mortgage loans have dropped three percentage points. You may decide to refinance the mortgage. Refinancing refers to replacing the present mortgage loan with a new loan at more favorable terms. Unfortunately, many of the closing costs are incurred again when the loan is refinanced, although some of the fees may be waived or reduced through negotiation if you refinance either through the same lender or not long after negotiating the original mortgage. Many of the same decisions you made when the original mortgage was taken out must be made again when you refinance. For example, should you take out fixed-rate loan or variable-rate loan, should you go with a 15-or 30-year mortgage, and should you pay points?

Borrowing against your property

After a homeowner has built some equity in the property, through the down payment, mortgage payments, and price appreciation, he or she may consider a home equity loan. A home equity loan is a loan secured by the value of a principal residence. A home equity line of credit permits the homeowner to be approved for the loan and then borrow on an as-needed basis. Homeowners can usually borrow up to 80 percent of the home’s current value less any outstanding mortgages. For example, suppose that you still owe $50,000 on a home with an appraised value of $150,000. You would be able to borrow up to $80,000 through a home equity loan or home equity line of credit (80 percent of the $100,000 equity position in the home). Competition for home equity loans has increased among financial institutions, and many lenders are willing to extend loans for more than 80 percent of the homeowner’s equity position.

Although home equity loans have tax advantages and are relatively easy to obtain, there are some disadvantages to consider. A number of fees and expenses, in addition to interest payments, are associated with home equity loans.

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