Refinancing, Home Equity Loans and Second Mortgages

Refinancing a mortgage is simply taking out a new mortgage. This involves the process of paying off the original loan with proceeds from a new loan using the same property as security.

• The standard guideline is to refinance only if interest rates have dropped at least two percentage points below the rate you are currently paying and you plan not to sell your home for at least a couple of years. Check that interest rates have dropped enough to make the cost of refinancing worthwhile.
• A repayment penalty could be the greatest deterrent to refinancing. Review your current mortgage documents.
• Compare the total costs to refinance, as well as interest rates, to determine if refinancing will save you money.
• Generally, the lower the interest rate, the more points the lending institution will charge. Shopping for points as well as interest rates may save you money.
• Shop around for a lender. Ask each for a list of charges and costs you must pay at closing.
• A lower interest rate gives you less interest to deduct on your income tax, which may increase your tax payments and decrease the total savings from refinancing.
• If you decide that refinancing is not worth the costs, ask your lender whether you may be able to obtain all or some of the new terms you want by agreeing to a modification of your existing loan instead of refinancing.

A home equity loan is based on the borrower's equity in his or her home. A second mortgage is a mortgage that has a lien subordinate to the first mortgage.

• Home equity loans and second mortgages can be large financial obligations and there are many points to consider before making this type of commitment.
• It's also risky to take on more debt. When you take out a home equity line of credit or loan or a second mortgage, you're actually putting your house at risk. If you can't make payments, the lender may be able to take your home.
• Borrowing more than your home is worth could create a serious problem if you need to sell it because the proceeds of your sale may not cover the debt you owe.
• Even if the interest rate is lower, these loans may actually cost you more because the repayment period is normally extended.

Beware of:

• Loans based on the equity in your home, not on your ability to repay based on your income.
• Lenders encouraging you to repeatedly refinance the loan, and, often, to borrow more money. Each time you refinance you pay additional fees and interest points. That only serves to increase your debt.
• Credit insurance packing where the lender offers one set of loan terms when you apply, then pressures you to accept higher charges when you sign to complete the transaction. Don't sign a loan agreement if the terms are not what you were given when you applied.
• Deceptive loan servicing where the lender doesn't provide you with accurate or complete account statements and payoff figures which makes it impossible to determine how much you have paid or how much you owe. You may pay more than you owe.

Additional tips to remember:

• Before you make a decision to refinance, get a second mortgage or home equity loan, consider the real issues and possible problems, research results and alternatives or you may only postpone or even magnify creeping indebtedness, overspending, and living beyond your means.
• When already in financial trouble, secured loans greatly increase the risk that you may lose your home. Alternatives should be considered such as reducing current expenses and increasing current income.
• Talk with mortgage lenders, real estate agents, attorneys and other advisors about lending practices, mortgage instruments, and your own interests before you commit to any specific loan. Ask for an explanation of any dollar amount, term, or condition that you don't understand.

Comparison Shopping Format

The above information should be understood to be a general discussion of the subject matter and DOES NOT constitute a legal opinion about the situation. For further information please consult a qualified attorney.

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