Home Equity Loan vs Refinancing

Home equity loan and refinancing are two excellent ways that can help you manage your finances. However, it may prove difficult to choose one from the other and should depend on what your financial goals are. You can opt for the lower payment schemes of cash-out refinancing, or you can choose the great tax benefits offered by ahome equity loan . The choice, however, does not prove to be as simple as this. Here is a comparison of these two types of loans to help you see which one is right for you.

Cash-out refinance simply means that you are refinancing your existing mortgage in order to lower your monthly payment and/or your current interest rate, and get some additional cash for other pressing reasons such as for home improvement, renovation, and the likes. If you are lucky to choose the right timing, you may be able to get all these with cash-out refinancing. Say, your home is valued at $300,000 and your existing mortgage balance is $200,000, your home equity remains at $100,000. You are free to borrow the remaining equity as you deem necessary.

Home equity loans are usually provided in two kinds: the home equity line of credit and the home equity installment loan. A home equity line of credit line means that you are borrowing against the value of your home; your home is your collateral to the credit. Home equity plans are usually set at a fixed time; say 10 years but with variable loan rates. Your interest rate and the annual percentage rate of your mortgage can move up and down depending on the market trends. During the specified time, you are free to obtain the cash when you need it, and pay only for what you happen to spend. Some mortgages are offered with payment of full outstanding balance, while others allow repayment over a fixed time.

On the other hand, an installment loan is a loan that has a fixed rate that stays the same all throughout the rest of your home equity loan terms. Also called the closed end home equity loan, you amortize your loan for periods lasting up to about 15 years. In this kind of loan, you usually receive a lump sum at closing depending on your home value, and you can not borrow further afterwards.

Which is better?

Remember that interest rates do not usually behave normally, much as you want them to. When this happens, home equity loans may actually prove cheaper than refinancing, although they are potentially riskier. Choosing what is better between the two should depend on individual circumstances. For example, if you plan to pay off your mortgage and do not need as much money, you can go for ahome equity loan to get lower rates and shorter terms. On the other side of the fence, with cash-out refinancing, you can get all your money up front and simply pay off interest and principal on a lowered monthly basis as agreed upon, with no frills. Weigh carefully based on what your financial objectives are and choose one which you think will give you a fairer deal.

Home Loan-Fixed or Floating Rate?

Interest rate is one of the important factor for home loan seeker. This is the reason they often ask whether to opt for a fixed rate or floating rate home loan. Firstly, it is important to understand what is the difference between fixed and floating rate home loan.

For the fixed rate home loan, the interest rate will remain fixed during the entire term of the loan. For instance, if you take fixed rate home loan for a 20 years at 8% per annum. This rate will remain same for the entire term, even market interest rates goes to high level. Floating rates are directly linked to the prevailing market rate of interest. This type of interest rate always fluctuates during the term of the loan.

The fixed rate is right option for those who wants a fixed monthly repayment in the sense of security. If the interest rates comes down, the fixed rate home loan doesn’t get the benefit of the reduced rate and borrower has to pay the same amount to the lender. Floating rates home loans are at least 1- 2% cheaper than fixed interest rates. If the floating rates goes higher, but it will be for a few period.

You can also decide by comparing the current fixed and floating rates offered by the lenders. Currently, very few lender offers fixed rate for the entire term. Most fixed rates schemes adjust to the floating rate scheme within a 2 year period from the inception of the loan. Since last year, many lenders are offering an approximately 8.5% fixed rate scheme for 2 years, which will then get reset after 2 years. The scheme can be available for 5 year period also.

A well informed person can make right choice for home loan. So, it’s always important for you to analyze the current market trends to have an idea about the home loan interest rate.

Subject: Best explanation of the market crises I’ve seen yet

Young Chuck moved to Texas and bought a donkey from a farmer for $100.00.
The farmer agreed to deliver the donkey the next day. The next day he drove up and said, ‘Sorry son, but I have some bad news, the donkey died.’
Chuck replied, ‘Well, then just give me my money back.’ The farmer said, ‘Can’t do that. I went and spent it already.’ Chuck said, ‘OK, then, just bring me the dead donkey.’ The farmer asked, ‘What ya gonna do with him?
Chuck said, ‘I’m going to raffle him off.’ The farmer said ‘You can’t raffle off a dead donkey!’ Chuck said, ‘Sure I can Watch me. I just won’t tell anybody he’s dead.’
A month later, the farmer met up with Chuck and asked, ‘What happened with that dead donkey?’ Chuck said, ‘I raffled him off. I sold 500 tickets at two dollars apiece and made a profit of $998.00.’
The farmer said, ‘Didn’t anyone complain?’ Chuck said, ‘Just the guy who won, So I gave him back his two dollars

Chuck now works for Goldman Sachs.

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