10 Things You Need to Know Before Getting A Refinance or Home Equity Loan

Refinance loans and home equity loans both allow you to get cash when you close on the loan. While both options can be a great way to save money and get money, there are certain things you should know before getting a refinance or home equity loan:

You Need a Good Reason to Get a Loan

It doesn’t matter if you are considering a refinance loan or home equity loan; you need to have a good reason for spending the money it will take to close on the loan. Good reasons may include the need for a better rate and terms or cash to consolidate debt or pay other outstanding bills. Whatever it is, make sure the loan will save you money in the long run, and more importantly, make sure you can afford the new loan payments. If you plan on refinancing, perform a breakeven analysis if you plan to move in the next five years.

Refinance Terms Vary

Not every refinance loan is the same. Some have lower payments during the term and one final balloon payment at the end. Some terms last 30 years, while others only last 15. If you are getting a refinance loan, make sure the terms will be manageable for you. I highly recommend a 30-year fixed mortgage as you can invest the difference between it and a 15-year or pay extra towards the principal to reduce its repayment length. For more on what a 15-year m0rtgage can cost go to https://kgmeyerpc.com/what-a-15-year-mortgage-really-costs-you/.

Home Equity Loan Terms Vary

Like refinance loan terms, home equity loan terms can also vary. Some loans are adjustable-rate options, while others are fixed. Term lengths can also fall all over the map, so it is a good idea to evaluate all of the options available to you before making any final decisions.

Introductory Rates Can Be Misleading

Sometimes known as “teaser rates,” introductory rates look good on paper but can be very misleading when dealing with refinance loans and home equity loans. Before being drawn into a loan with introductory rates, you should clearly understand when the rate will adjust, what the rate cap is, and what your payment might be at its highest. I would suggest avoiding a rate that is not fixed. For current refinance loan and equity loan interest rates visit https://www.bankrate.com/mortgages/.

Fees Need to Be Compared

When most people are looking for refinance loans or home equity loans, they compare interest rates. While this is a smart thing to do, interest rates aren’t the only thing that should be focused on in the comparison process. Because lending fees and closing costs can vary from lender to lender, you also want to take time to make comparisons between these variables.

Loan Interest Isn’t Always Tax-Deductible

Contrary to popular belief, the interest paid on refinance loans and home equity loans isn’t always tax-deductible. Before automatically assuming that you will get tax savings, you should speak with a qualified accountant. An accounting professional will be able to look over your situation, as well as the potential loan, to determine whether or not you are eligible for tax deductions.

There is No Such Thing as a Free Loan

Don’t be fooled by lenders who offer no closing cost refinance loans or home equity loans. There is no such thing as a free loan. If you don’t pay the costs upfront, you will pay for them later on in the loan. While this may not seem so bad, you need to remember that you will also be paying interest on anything not paid upfront.

Negative Amortization Loans are Risky

Though they are not as popular as they once were, lenders still offer negative amortization loans. These loans present a great risk to the borrower because loan payments aren’t always enough to cover the required interest payments. Any unpaid interest will be added to the unpaid principal, making it very difficult to pay the loan off promptly.

Tax Assessment Aren’t Genuine Appraisals

If you are thinking about getting a refinance loan or home equity loan, don’t assume that the local tax assessor’s appraisal represents your home’s actual market value. Tax assessments aren’t genuine appraisals. Your home may be worth quite a bit more or quite a bit less than the amount indicated on your tax assessment. The only way to find out how much your home is worth is to contact an independent real estate appraiser.

You Can Back Out

Federal law allows you to back out of a refinance loan, a home equity loan, or any other type of loan that will be using your home and property as collateral. You have a total of three days to change your mind after the loan has closed. If you are unsure about the loan for any reason, this window of opportunity is your chance to get out before it is too late.

If you have any questions, please reach out to me or any other qualified fee-only Registered Financial Consultant.

Listed on https://personalfinanceblogs.com/, KG Meyer P.C.’s blog is found with hundreds of other great blog posts on just about everything: personal finance.

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