Board Topic: refi or equity loan
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refi or equity loan

Posted by: susan Sep 22 2003, 09:43 PM
I refinanced my property this year from a 30yr to 15yr at 5.25%. I need to pay back a personal loan now and I need $100,000 cash out. Should I refi back to a 30yr loan at 5.75% or take a home equity loan for 6.75%. Which way would be better.

The refi for 30yrs would give me a monthly payment I can handle but if I go with the equity loan I will be paying that plus the 15yr mortgage. My concerns would be paying all the fees, bringing my loan back to 30yrs, and wasting an opportunity to cash out with the refi at the beginning of the year.

Posted by: loanuniverse Sep 23 2003, 09:05 AM
Susan:


The answer to this can be very complicated { involving present values and discounting the payments back to the present }. However, I am going to try to make it simple, by going over the items that you must consider. Take into account that some of this information is unknown to me at this time.

1 Forget about wasting an opportunity to cash out with the refi at the beginning of the year. It is gone, it won’t come back. {well… it might come back if rates were to drop again, but if I knew how to predict rates I would not be working for a living}

2 Refinancing fees must be taken into account in the matter of the 30-year mortgage. Assuming $3,000 of fees, it will take you approximately three years to get that money back using the difference in rates between the mortgage and the home equity loan.

3 Rate differential is a two edge sword in this case, while you would spend an additional 1% in the $100,000 by going with the equity loan, refinancing the mortgage would affect the whole outstanding balance under the mortgage by increasing your current interest from 5.25% to 5.75%. This means that if your current balance is $200,000 you will pay an additional $1,000 in interest under the new mortgage. This would have the practical effect of eliminating your benefit.

4 All this doesn’t mean anything if the combination of the existing mortgage and the proposed home equity result in payments that you can not afford. You said: “The refi for 30yrs would give me a monthly payment I can handle but if I go with the equity loan I will be paying that plus the 15yr mortgage.” Being able to pay the loan is of course the important thing.

Hope this helps.
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