You may have gotten a very good mortgage rate when you purchased, or
refinanced your home, but now you are considering the options
for accessing your home
equity. Should you refinance your existing mortgage and give up your low
rate, or get a home equity loan?
Let's say that you have a $300,000 mortgage at 5%, with principal and interst payments of $1,610, and now you want to get $50,000 cash
out. If today’s refinance rates were 1% higher, a $350,000 mortgage payment would be about $2,098 per month.
Compare that to a combined monthly 1st and 2nd mortgage payment of
$1,997, which
includes $387 for $50,000 home equity financing at 7%, plus the
$1,610 existing mortgage payment.
In this example, you could save about $100 per month by
choosing a home equity loan instead of refinancing. If you
wanted to pay off your loan early, the term could be reduced by
about 10 years by applying the savings to the payments, which
otherwise would be lost on a refinance.
What if the home equity loan rates are higher because your
credit score is lower than you thought, or your home value is
less than expected? Using the above example, if the home equity
loan rate was 2% higher, your combined payments would save about
$37 per month.
What about your loan to value ratio? If you were to refinance
your mortgage and exceed 80% of your home’s value, the lender
typically requires that you buy mortgage insurance, (PMI). The
annual policy for our example loan of $400,000 could cost you
about $1,500, which is $125 per month.A home equity loan does not require any mortgage insurance,
regardless of the loan value.
The amount that can be saved by using a home equity
loan is relative to the balance of your existing mortgage. The
larger your mortgage balance, the more you can potentially save.
Your savings is also relative to the difference between your
current rate and today’s available rate.
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