Should You Refinance Your Home?

For struggling homeowners, a second mortgage can provide greatly needed financial relief or it can impose a serious repayment burden.

With home loan interest rates at their lowest in thirty years, many homeowners are tempted to refinance their properties to pay less interest for a lower mortgage payment. To cover the cost of the refinancing process including application fees and loan points, applicants may be offered a home equity line of credit, much like a credit card, to handle these expenses. Since the line of credit is based on the home's accumulated value, loan interest fees are tax deductible. In a sense, property owners get to enjoy the vested equity in their homes rather than wait for the entire mortgage loan to be paid in full.

However, the down side to a home equity loan, which becomes a second mortgage, is that if you default by not making payments on time, your property can be repossessed by the lending institution. In addition, the new equity line payment added to the reduced mortgage payment may be nearly as much as, or more than, your previous monthly mortgage.

Before taking out a home equity line or credit, decide if a second mortgage will be more of a hindrance than a help. Here are some tips that may help:

1. Get the best terms. It's important to shop for low rates and comparative values among competing lending institutions. Ask about possible hidden costs and be sure you have a fixed interest rate to avoid unexpected shifts later that could lead to higher payments. Negotiate, if possible, for fewer or no points in the loan process. Ask if the application fee can be waived. Find out what the anticipated monthly payment will be on your second mortgage.

2. Don't take an equity line of credit if you don't need it. No matter what the lender claims, you can probably get a second mortgage at a competitive rate anytime you want one until interest rates climb again. Just because it's available now doesn't mean you have to apply now. If you're offered a $5,000 line of credit, but your application fees are just $2,000, don't use remaining credit. Pay off the $2,000 as soon as possible and don't incur further debt.

3. Make emergency payment adjustments if needed. If you lose your job or face a wage cut, contact the loaning institution to make payment adjustments. Chances are that most banks will accept partial payments temporarily until your hours increase or you find another job. It's the deadbeats who avoid contact following non-payment that cause problems for banks, leading to repossessions. Be responsible, even when reporting an inability to pay, and your creditors will work with you.

4. Responsibly manage your home equity line of credit. Don't overspend or charge things you don't need. View the second mortgage as a temporary loan that needs to be repaid as soon as possible. Pay more than the required payment limit, and don't add more purchases as the balance drops. Get tax advice for accurately reporting the interest on this credit account.

Some folks feel that a second mortgage makes prudent use of your home's equity, while others feel that any kind of debt, especially an account that uses your home as collateral, is unwise. Get an expert opinion before applying for this type of account to avoid making a long-term mistake either way.

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