Need Cash In a Hurry?
Refinance vs. Home Equity
Loan
by Earl Baker
Your home doesn't just give you shelter from the elements. It
can also buffer you from financial storms, by absorbing the blow from unexpected
events like illnesses and job losses. Naturally, cashing out equity from your
home should be a last resort. But, when it comes time to draw on your home's
value to keep your family going, will you get better results from a refinance or
a home equity loan? Follow these steps to figure out which option works best for
you.
Think About the Long Term. Estimate how long you expect to stay in your current
house. Depending on the severity of your situation and the real estate market at
the moment, you might even want to consider selling your home altogether and
taking on a short-term rental in your new locale. If you expect to stay in your
current home for a few more years, the flexibility of a home equity loan may
work for you. Otherwise, a refinance can restart the clock on your fifteen or
thirty-year term.
How Much Cash Do You Need? A flexible home equity loan or line of credit may
allow you to write checks for only the amount you need to get by. If you
experienced a job loss, you can borrow against your equity in smaller chunks and
repay your loan quickly once you get back on your feet. If you or a family
member suffered a medical emergency that will permanently reduce your income,
you may want to refinance your house to accommodate your new budget.
Will Your Equity Drop Below Twenty Percent? In an extreme situation, when you
need to borrow so much money that your equity will drop below twenty percent,
you may have to accept a home equity loan to prevent expensive personal mortgage
insurance from kicking in on your primary mortgage.
Can You Handle the Expenses? Refinancing may make the best long- term sense, but
your current condition may leave you without the cash flow to accommodate fees
and closing costs. If you can find a lender who can refinance your home with no
closing costs, you may find yourself facing a higher interest or even a
prepayment penalty that locks you into that mortgage for life. Although a
short-term home equity loan may carry a higher interest rate, you may be able to
pay it back fairly quickly and avoid some of the long-term expenses it brings.
Earl Baker is a writer for
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