Consider Home Equity Loan Refinancing to Lower Your Rate

Home equity loan refinancing is the process of paying off your current home equity loan with another at a lower rate. There is no real way to lower an interest rate without modifying the loan, and refinancing is the most common form of loan modification. You should only refinance, though, if the benefits of the lower rate are greater than the hassle and penalties imposed for the modification.

Why Refinance your Home Equity Loan?

There are two primary reasons to refinance a home equity loan. The first is to avoid defaulting on the loan if you can no longer make the monthly payments. In this is the situation you are faced with accepting nearly any penalty to avoid the default is a better option.

The second reason most people refinance a home equity loan is they can capture a lower rate due to changes in their personal credit, or the credit market as a whole. If this is the reason why you are refinancing your loan, proceed with caution and consideration of the drawbacks as well as potential advantages.

When to Refinance your Home Equity Loan

The best time to refinance your home equity loan comes is whenever you can capture a lower rate, due to your personal financial situation or the economy. If your credit score has grown tremendously since you first took the loan, the time may be ripe for refinancing.

Further, if the national prime interest rate has dropped or the credit market has opened up, then the favorable market may be a good time to refinance. Remember: you should not refinance your loan if you are looking to take another debt in the near future. The penalties you will face for refinancing will make the next loan more expensive, counteracting the affect of the initial refinance.

Advantages of Refinancing your Home Equity Loan

The main advantage of refinancing is to make your home equity loan more affordable. However, you may also capture benefits like better terms, extra cash and even a shorter loan contract. If you believe you can pay off your loan sooner by refinancing to a higher monthly payment schedule, then this presents a large advantage to save money on the overall cost of the loan.

Disadvantages of Refinancing your Home Equity Loan

There are two key disadvantages with refinancing any loan. The first is prepayment fees assessed by your original lender. In some cases, these fees will be high enough on their own to make the lower rate on the new refinancing loan a total wash. You will only save money if the fees are relatively low and the new interest rate is much lower than the old.

The second key disadvantage is the drop in credit score you will experience after a loan modification. The original lender will report you have broken your contract, not that you have paid it off in full. This credit drop is not a huge problem if you do not intend on seeking another loan within the next few years. You should also be prepared to accept this drop if refinancing will help you avoid defaulting.

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