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Home equity loans: The best place to get cash

[Dec 18, 2010.]


A new home equity loans vs. a new first mortgage refinance

Better interest rates, lower closing costs, and lower monthly payments make home equity loans cheap compared to refinancing a first mortgage.

Only 5 weeks ago, the national average for a conforming 30-year fixed first mortgage, was 4.17% with 0.8% points. This week, according to the Freddie Mac Primary Mortgage Market Survey (PMMS), a new 30-year fixed conforming first mortgage averaged 4.83% with 0.7% points. This large and rapid jump in mortgage rates has made getting cash out a volatile process lately.

If you need cash out, it is likely going to be more expensive to refinance a first mortgage versus just adding an home equity loan or home equity line of credit (HELOC). Home equity loans are cheap for 3 basic reasons.

  • Home equity loans typically have very low closing costs, which makes them cheap loans compared to refinancing first mortgages. When you refinance a first mortgage, you typically pay for a full appraisal, title and escrow charges and expensive lender fees. Closing costs for a new first mortgage can be several thousand dollars compared to a few hundred, typically for a new home equity loan.

  • Home equity loans and HELOCs often offer interest-only monthly payments. Compared to an amortized monthly payment, a home equity loan can be easier on your cash flow. When you are spending less money each month on your mortgage, you have more money in your pocket for other bills--bills which probably carry higher interest rates.

  • The interest charged on home equity loans is often based on the prime rate. The prime rate just hit its 2nd anniversary at 3.25%. This means, for the last two years, home equity loans and home equity lines of credit (HELOCs) have been very cheap loans compared to refinancing a first mortgage. To date, the economy seems to warrant an extended period of low interest rates. It is not likely that the prime rate will increase any time soon.

If you are refinancing to get cash out, get a free rate quote for a new home equity loan.


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.

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