Compare Home Equity Loan vs. A New First Mortgage

[Sep 18, 2009.]

 

With interest rates at historic lows, many people are refinancing their homes.  When does it make sense to take out a home equity loan vs. starting over with a new first mortgage? Below are the top six things to consider when making this important financial decision.

Top Six Things - Choosing Between A New First Mortgage or a Home Equity Loan

1. How long have you been paying your current first mortgage?  Most of the interest that you will pay on a mortgage is collected in the first ten years.  If you have been making payments for several years, it might not make sense to recast your mortgage and start a 30 year term again.  A home equity loan allows you to access your equity for repairs or debt consolidation and may actually save you interest.


2. Your mortgage lender should be able to compare your current first mortgage to a new first mortgage using the Truth In Lending disclosure.  This disclosure can be used to compare the amount you will pay in interest between one loan and another.  Have your lender also prepare a Truth In Lending for a home equity loan.  This way you can be sure you are seeing the full picture.


3. If your interest rate is very low on your current first mortgage, or if you have paid most of the interest due in those first ten years, it likely will not make sense to do a new first mortgage.  A home equity loan may be a less expensive choice even though the interest rate might adjust.


4. Home equity loans are normally based on the Prime Rate.  Familiarize yourself with how this index adjusts. If the new first mortgage you are considering is also adjustable, you should consider how the different indices might behave.


5. Consider your cash flow needs.  A home equity line is normally an interest only loan for the first part of the term.  This usually makes it cheaper than an amortized payment. If you are one of the many people who have seen their income decline recently, improving your cash flow could be a deciding factor.


6. If your home is owned free and clear, a new first mortgage or a home equity line present two different plans.  A home equity loan can be used for emergencies and wouldn't accrue interest if left unused.  A new first mortgage would give you a lump sum upfront but would have to be paid monthly.

To find mortgage lenders offering the lowest rates on both new first mortgages and home equity loans, visit this link now.

 

About Author:

Renee Morgan has been a loan officer for over eighteen years. She is also a freelance writer and guest expert for radio and TV.