How to Choose Between a Refinance, a HELOC and a Second Mortgage
Have you been thinking about using the equity from your home? Would you like to get out of any debts you may have incurred? Is your home in need of upgrades that you really can’t afford? Do you have other financial obligations that you would like to take care of?
It really doesn’t matter why you’ve made the decision to access your home’s equity. What’s important is that you know what your options are and the difference between them. Each of your options has a different set of qualifying rules and benefits. Your personal circumstances should be the deciding factor in which of the three available options are best for you.
Refinance
The first of three options is to refinance. When you know exactly how much money you will need access to, refinancing is possibly your best choice. Refinancing does require that you have a minimum credit score of 650 and 20% in your home. Meeting those qualifications will make you eligible to refinance through a top lender; gaining access to up to 80% of the value of your home. Of course there are even more pros and cons, such as:
- One of the benefits of refinancing is that you will receive the money that you have accessed in a lump sum payment at a fixed or variable rate. Interest rates for refinancing are calculated based on the total amount of the loan.
- Be aware that there are fees and penalties associated with refinancing. Some of these penalties can total as much as three months worth of interest. Interest and principals are included in the amount that you are paying towards your loan.
Some of the cons to refinancing may make you think twice. For example, you will have to pay off your present loan simultaneously. However, keep in mind that you will be making lower monthly payments. However, refinancing is an excellent option for anyone who needs to cover a large expense or purchase.
HELOC
Your second option is known as a “HELOC”, a home equity line of credit. Opting for a HELOC will allow you to access 65% of your home’s value through a credit line from a lender. As opposed to being giving a lump sum payment, you will have access to the money as you need it. Also, some of the best benefits of a HELOC are that there are no fees and the possibility of only making payments on the interest of the loan.
To qualify for a HELOC, you must have a minimum credit score of 650 and 20% equity in your home. The loan is repaid at a variable rate, in addition to the set premiums. Some lenders have less stringent guidelines and may be able to offer other options if you don’t meet the credit score and equity requirements. However, it’s more than likely that these aren’t considered top lenders.
HELOC’s are ideal for people who aren’t certain how much money they need access too. It’s a safe way to guarantee that enough money is available, while not getting in over your head by incurring more debt than necessary.
Second Mortgage
Your final option is to take out a second mortgage. This is common among people who don’t meet the necessary requirements to refinance or to obtain a HELOC. In other words, your home hasn’t built the minimum 20% equity or your credit score is lower than 650. Applicant for second mortgages may qualify through a trust company or private lender with 10% equity and a credit score as low as 550.
If you decide to take out a second mortgage, you should be prepared to pay a number of fees. You will be responsible for the appraisal of your home, legal and insurance fees. The interest fees will be based on the total amount of the loan. However, a second mortgage can grant yo9u access to up to 90% of the value of your home. Also, taking out a second mortgage can assist in clearing up debt or consolidating payments. Keep in mind that as with refinancing, you will be required to pay off your second mortgage along with the existing one.
Accessing the equity that your home has built is a choice that is made for many reasons. Knowing and understanding all of your options can help prevent you from making a big mistake. Carefully evaluate your personal circumstances, your needs and the long term effects of your decision. Just as with any major decision you make in life, starting off right can lead to a strong finish.
Lastly, when it comes to discerning which option is best for you, speak with a qualified mortgage specialist today.