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Refinance or Home Equity Loan?

Mark Cappel
UpdatedJun 2, 2010

Which is better, refinancing my first mortgage or getting a home equity loan?

Should I refinance my mortgage or should I get a home equity loan? I am looking for some cash out to do some home improvement, and maybe a small addition? How do rates compare and is a refinance loan or a home equity loan a better deal?

Your question comes down to shopping and simple math.

As I write these words in mid-2010, home equity loans are at a low rate. However, the low rates are for adjustable-rate loans, and it is my opinion that as the economy improves we may see inflation. As inflation rises, the adjustable-rate loan rate will reset upward. This will put adjustable-rate HELOC borrowers in a difficult spot as they see their monthly payments increase. You can find fixed-rate HELOCs, however, the typical rates for these loans is around 6.5%.

Rates on first-mortgage refinances are the lowest in recent history. If you have at least 20% equity after accounting for the additional cash you want to take out, and have good credit, then a first-mortgage cash-out refinance is the smart choice.

Refinance basics

As you may recall from when you qualified for your mortgage, a mortgage lender wants three things from a potential customer: Steady income, a relatively clean recent credit history, and a debt-to-income ratio of 35% or less. Customers who qualify for a mortgage or a mortgage refinance have all three of these qualities, plus a down-payment in the case of a mortgage.

A refinance is almost exactly the same. Do some homework to see if you qualify. Start with the article How Do I Get a Mortgage Refinance Loan? Next, I recommend you download a Uniform Residential Loan Application (Form 1003), complete it, and start your refinance mortgage loan shopping. Then, go to the mortgage refinance saving center for no-cost, pre-screened quotes from mortgage refinance lenders.

I hope this information helps you Find. Learn & Save.