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Home equity loan

Home Equity Loans and rising interest rates.

Long term cash out refinance on a fixed rate of interest is usually the first choice of most homeowners when it comes to tapping in the home equity loan in their house. Cash out refinance mortgage comes with the advantage of lower monthly payments, which is one of the biggest attractions for most homeowners. But alongside comes the disadvantage of paying a larger amount of total interest over the mortgage because of the long term.

Taking a look at the current market trends, where the interest rate is constantly rising, cash out refinance doesnt seem to be the most desirable form of borrowing against home equity. If you have taken your first mortgage a few years back then probably you are on a terrific rate, and getting your mortgage refinanced will put you on to higher interest rates, taking away all your savings and increasing your monthly bills. Surely, that doesnt sound to be the most practical method of generating finance from your home equity.

The value of your house has definitely appreciated since the time you bought the house using your first mortgage. And this value appreciation has given you the opportunity to use this equity to improve your personal finances and support expensive requirements like home improvements or childrens education.

But unfortunately, the current upswing in the interest rates is restraining your chances of benefiting through cash out refinance. In this scenario, the most practical and sensible solution is to use a home equity loan or a home equity line of credit. Both these can serve as a good short term solution for your financial problems. And the sooner you payback; the better it will be your financial standing in the long run.

Why is a home equity loan a better choice

What ever be your choice, that is a home equity loan line of credit or a fixed rate home equity loan, the amount is usually smaller than the mortgage and so you can pay it off faster. With a smaller payback term the total amount of interest, which you have to pay over the loan will also be small. The home equity line of credit comes on an adjustable rate and works more like a credit card, allowing you to make borrowings for short periods and keeping your cost to a minimum because you have to pay interest only on the money that you withdraw and only till the time you paid it back. A home equity loan is on a fixed rate of interest and for a fixed term with fixed monthly payments. Using these alternatives gives you the ability to save the long term interest dollars which you would have sacrificed with the mortgage refinance.

As against a cash out mortgage refinance, a home equity loan or own equity line of credit is easier and faster to close and requires less documentation and lower fees. In most cases the lending institution will not even ask for a fresh appraisal of the property, as they can use the appraisal from the previous mortgage, thereby letting you save a good amount of money.

Down the road when the interest rates on mortgage loans become more amicable, the homeowner can roll in the home equity loan with his first mortgage into a refinance mortgage. The currently rising interest rates will definitely sober down in a few years and at that point of time you can get your first mortgage refinanced and payoff your home equity loan.

As a homeowner you have plenty of options to borrow money against your home, but with the rising interest rates a flexible line of credit or a fixed rate home equity loan are the best solution. These two methods allow you to use the equity without costing you added cash over the long term.

Understanding home equity loan rates.

The interest rates on home equity loans fluctuate on a daily basis in tandem with the interest rates set by the Federal Reserve. Since 2004 when the interest rates on home equity loans were at a 40 year low, there have been fifteen consecutive raises in interest rates.

For a homeowner it is essential to understand home equity loan rates when they

re planning on a home equity loan, so as to evaluate and examine the different loan programs. Most of the home equity loans are on a variable rate of interest with usually a low introductory rate that takes a sudden rise after the set time period, while there are just a few home equity loans which come on a fixed rate of interest. There is a lot of variation in the home equity loan rates across different programs and across different lenders. Speaking to different lenders and educating yourself about the different home equity loan programs can be very rewarding. There are certain websites which can help you to make comparisons between different loan programs being offered by different lenders, but of course you should not stick just to what these websites say and carry out your personal research as well.

Sometimes the structure for home equity loan is difficult to comprehend; making it difficult to find out how much will be the money that you will spend on the loan. Most of the low introductory rates experience a sudden jump when the introductory period is over. To keep yourself at minimum risk, you need to understand how the rates are capped and what will be the kind of variations at the end of each period and the variations over the entire life of the loan.

The most effective tool for comparison is the annual percentage rate which indicates the total cost of borrowing on a yearly basis. But apart from the APR you also need to take a look at the different fees, points and closing costs associated with the home equity loan because as against second mortgage the APR for home equity loans does not include the additional costs.

Lastly, when interest rates turn hostile, drop the idea of using a mortgage refinance and rather pick up a home equity loan or a home equity line of credit. And before you make the final decision contact several lenders and compare different programs to get the most suitable deal.

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