Q-We are considering refinancing versus taking out a home equity loan or a second mortgage. How do we determine which way to go?
A-Second mortgages or home equity loans will always have a higher interest rate than a first or refinanced mortgage. This is because they are a higher risk proposition for the lender.
Even though you are refinancing your exisiting mortgage, the new mortgage is considered as the ”first” to a financial institution.
There are, however, additional costs associated with refinancing versus a home equity loan, although home equity loans may offer better tax advantages than refinanced mortgages.
Typically in refinancing, a consumer should expect to pay the same types of closing costs as when they first bought the home. Exceptions in closing costs may be in the elimination of city, county and state transfer fees. Also, occasionally fees for private mortgage insurance may be eliminated if the refinanced mortgage is 80 percent or less of the new appraised value.
The rule for refinancing is do it if your current interest rate is 2 or more percent over the new rate and you intend on staying in the home for three years or more.
For example, if your existing $150,000, 30-year fixed-rate mortgage is at 11 percent and you want to refinance at 9 percent, the monthly mortgage payment difference would be $221.55. The monthly payment would fall from $1,428.50 to $1,206.95. Typical closing costs including points would be around $5,525. Therefore, you would have to calculate how long it would take to recoup $5,525 at $221.55 a month-or about 25 months.
An increasingly more common strategy for homeowners is to refinance their 30-year fixed-rate mortgage with a 15-year mortgage.
The resulting monthly payment is usually only slightly higher than the exisiting payment, though the interest rate is less than the 30-year loan and the term period is substantially reduced.
