HELOCs are revolving lines of credit, much like credit cards. You can borrow against your home equity up to a certain limit, upwards of 90% or more of your home’s appraised value, and only pay interest on the amount you use. HELOCs have variable interest rates and can be used for any purpose.

In contrast, HELOANs are lump-sum loans that you receive upfront and pay back over a fixed term with a fixed interest rate. You can borrow against your home equity, and the amount you can borrow depends on your home’s appraised value and creditworthiness. HELOANs are often used for significant expenses like home renovations or medical bills.

When considering whether to take out a HELOC or HELOAN, there are some crucial differences to keep in mind. Repayment terms for a HELOC allow you to pay back what you use and can last for 10-20 years. HELOCs often have an introductory interest-only repayment period, often 10 years (followed by a repayment period of 20 years).  On the other hand, HELOANs are paid back over a fixed term, typically 10-30 years. Interest rates for HELOCs are usually variable, while HELOANs most often have a fixed interest rate.

In terms of flexibility, HELOCs are the better option. You can borrow and repay as needed, up to the maximum credit limit, and can reuse the line of credit over time, typically for the first 10 years. This makes HELOCs ideal for homeowners with ongoing or unpredictable expenses. HELOANs may be better suited for homeowners with a specific, one-time expense in mind.

When it comes to closing costs, HELOCs usually have lower costs, as you only pay for what you borrow. HELOANs may have slightly higher closing costs as you borrow a lump sum upfront. Both options come with some risk, such as the risk of increasing interest rates with HELOCs or larger fixed monthly payments with HELOANs.

Deciding between HELOC vs HELOAN always depends on your unique financial situation and goals. If you need ongoing access to cash or have unpredictable expenses, a HELOC may be the better choice. For a specific, one-time expense, a HELOAN may be more suitable. Understanding the differences between the two can help you make an informed decision.

MasonMac loan officers have the experience to help you navigate the two options and determine which may be right for you.  Give us a call to learn more, or you can always reach out for a quick response by asking a question here.

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If you need to access cash from your home equity and have no interest in selling, in most cases you’re left with limited options to tap into the equity you’ve likely grown over the past few years of high appreciation.  It often boils down to a HELOC VS Refinance.  There are some definite benefits and drawbacks to both options so it’s important to know the ins and outs so you can make a smart financial decision that offers the most benefits short and long term.  Let’s start with the HELOC!

HELOCs

HELOCs are Home Equity Lines of Credit.  They act similarly to a credit card, in that you have a limit (based on the amount of equity in your home), and can access the line of credit to draw funds in either a lump sum, or as needed, during a “draw period”.  Most HELOCs are structured as 30 year loans, with an initial 10 year “draw period” where you can access the cash from your home, followed by a 20 year repayment period in which no more cash can be taken out and the withdrawn funds must be repaid.  During the draw period, most HELOCs offer interest-only payment options.

The plus side of this payment option is that it allows for lower monthly payments so you can borrow the money you need for things like debt consolidation, home renovations, or anything else, without making too large of an impact to your monthly budget.  Another perk of HELOC products is they often have lower closing costs than a full refinance, but many times they will be accompanied by a small annual fee (again, similar to many credit cards).

The HELOC is not without it’s downside.  Since HELOCs tend to be based on the prime rate, the interest rate is often variable based on what the Fed does to the Fed funds rate.  Unlike first mortgage rates, HELOC rates vary, sometimes frequently, so payment amounts aren’t fixed and can be unpredictable year over year.  Another downside that’s not often considered is that if you want to refinance your first mortgage in the future and you have a HELOC, most times your new refinance rate will be higher as there’s a penalty for having a 1st and 2nd lien, but also a penalty for “cash out” if you’re consolidating a HELOC that wasn’t used to purchase your home.

So while HELOCs may be a more affordable option up front, they could prove more costly long term in the event rates rise, and they’ll make future refinances (to take advantage of lowering rates) more expensive

Refinance

A refinance is a restructuring of an existing mortgage lien, in which a new loan replaces the existing loan.  With a cash out refinance (often referred to as an “equity loan”), borrowers may restructure their existing debt and borrower additional funds from the equity in their home as well.  A refinance can also be used to simply reduce an existing interest rate or change the term of a loan (for example, from a 30 year to a 15 year loan term).  When no additional cash is borrowed, or only a very small amount, it’s called a “rate/term refinance”, or “no cash out refinance”.

The perks of a refinance to take cash out will depend on the situation, but fixed rates are available so a borrower knows what their payment will be today, 6 months from now, and for years to come.  This offers more long term planning without having to worry about rates or the overall mortgage market in terms of the effect on monthly payment and finances.  A refinance may also offer the possibility for more cash out, and is available on various property types and ownership situations (for example, HELOCs aren’t widely available in investment properties, but investment property owners frequently borrow against their equity with refinances).  In a falling rate environment, refinancing can sometimes offer customers cash without impacting their monthly expenses!  For example, on a $400,000 mortgage at 5.5%, the monthly payment is close to the same as a $500,000 mortgage at 3.5%, so in a falling rate environment, a refinance can offer cash without negatively impacting your budget!.

The downside of a refinance is that if you currently have a very low interest rate, increasing it by much to access cash may be a tough pill to swallow.  It can make sense when paying off higher rate consumer debt, but whether it’s worth it depends on overall savings.  Refinance closing costs tend to be higher than HELOC closing costs, too, sometimes by a few thousand dollars.

When it comes to the HELOC VS Refinance debate, everyone’s situation is different and since both products offer different short and long term benefits and pitfalls, it’s really important to talk with an expert about the available options.  Our MasonMac loan officers are here and ready to help you decide – when it comes to HELOC vs Refinance, what’s right for you?

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Since the 1980s, rates in the US have consistently fallen on mortgage loans, with new all time lows regularly being established.  Refinancing can be a great financial decision, but it’s important to consider a few things before diving in so you can be prepared for the process, outcomes, and ultimately end up with a loan that offers you the most benefit possible.

1.  Act Quickly

If a refinance will benefit you financially, it’s important to act quickly.  The market moves every day, and rates change daily (sometimes multiple times during a day) so if a refinance benefits you, it’s important to act quickly on an application and locking in.  If you’re saving $500/month, it’s better to lock in that savings than trying to find another lender that can save you an additional $20/month while risking the market potentially getting worse.

2.  Understand a LOT Goes Into Your Rate

Mortgage rates vary a lot based on many factors, so don’t trust the ad, and understand that if things change on your application, the rate/product offering can vary, too.  For example, on many loans rates will be different (sometimes much different) based on just a 20 point difference in FICO score.  Different loan products (FHA vs Conventional, for example) have different rates, too.  Property type (Condo, Single Family, Manufactured/mobile) will often result in different rates, too.  Some other factors are loan amount, area, and the amount of equity you have in your property.  A good loan officer will ask the right questions up front to make sure your rate quote is accurate, but understand there are a lot of things that influence rates beyond what you see in the ads!

3.  You Can’t Catch the Bottom (Without Some Luck)

When rates fall, there are many factors that influence the rates a lender can offer.  One of those factors is capacity, or the number of loan applications a lender can handle and process at one time.  When rates fall and application volume increases, it can lead to longer rate lock periods, which cost more.  Additional staffing needs and system strains can also cause the margin lenders need to maintain on loans to increase to cover additional overhead, resulting in artificially higher rates.  The borrowers who catch the absolute lowest rate tend to be lucky and beat the crowd when applying.  After all, we don’t ever know when rates were the lowest until they’ve already moved up.

4.  Consider Your Benefits

There is really no magic rule when it comes to refinancing.  Some loans, like a VA IRRRL, require very specific changes to an existing loan, and all refinances should have a tangible benefit to a borrower – but for some people, $100/month savings is huge.  For others, taking cash out or reducing a loan term are where they find value.  Each situation is unique, but what’s consistent is that every refinance loan should be worth the cost.  Consider closing costs, and determine if the benefits of the refinance make sense for you.  One general rule is that a refinance is worthwhile if the monthly savings quickly offset your closing costs.

5.  Life Doesn’t Happen in 30 Year Increments

Just because you’re considering a 30 year mortgage, it doesn’t necessarily mean you should think about “all that interest you’ll save over 30 years”.  Odds are, you won’t have your loan even close to that long!  In 2018, the median duration of homeownership in the US was 13 years (according to NAR), and on top of that, many people have multiple loans while in a home.  The life cycle for many home buyers and homeowners often includes rate/term refinances to reduce monthly payments, cash out loans to use home equity, or term reduction loans to shave interest off the mortgage, so it’s not uncommon for people to have a new mortgage every few years as markets change and life events occur.  For these reasons, looking at “savings over 30 years” is going to offer a poor vantage point for most people, and an unrealistic picture.  Instead, focus on shorter term (3-5 years) benefits, BUT:

6.  Focus on Long Term Security

Always play it safe when it comes to a mortgage.  In most cases, it’s not just finances, it’s your home, so be smart when it comes to analyzing savings, rate, etc.  For example, if you’re in your forever home and don’t have much equity, a short term ARM loan may not be the greatest product for you.  If you can see yourself in your home for 3-5 years, a 7-year or 10-year ARM may make sense.  If you’re unsure but could potentially be in your home longer, a fixed rate loan may be a better option for you even if the payment and rate are higher than other products available.

7.  Work With a Savvy Advisor

Any lender can quote rates, drop ads in your mailbox, or advertise online.  You’ll end up in the best position if you work with someone you can trust.  Get referrals, and make sure your loan advisor can walk you through cost-benefit analysis, talk you through various options, and asks you questions to help determine which product is right for you.  The lowest rate isn’t always the best option, and when restructuring what is often the largest and most complicated debt you’ll have, it makes sense to get it right every time.  Closing costs for a mortgage are often in the thousands of dollars (for all loans – those ‘no closing cost loans’ have costs too, they’re just built into the rate), so it can be extremely costly to get the wrong loan.

8.  Find a Company with a Good Track Record

If you don’t have a loan officer you love and haven’t gotten a strong referral, work with a reputable lender that has a lot of great online reviews.   See what other customers are saying, check how long the company has been around (avoid “pop up” refi companies that pop up during periods of falling rates), and make sure they have a good track record.  If a company has only a handful of reviews or is difficult to find online, you’re likely rolling the dice.

Want to see how a refinance could benefit you, or what options you have?  Check out our refinance advisor and one of our experts can get you information on what could work best for you!

The post 8 Things to Consider When Refinancing appeared first on Mason-McDuffie Mortgage Corporation.

While as a mortgage company we certainly have skin in the game when it comes to refinancing, transparency is also the name of our game, and we want you to know the truth to the question “is it smart to refinance my home?”.  And that truth is, it depends.  First, what is a refinance?  Refinancing is the restructuring of your mortgage loan, paying off the old loan and replacing it with a new loan under different terms.  You can refinance simply to reduce your interest rates, or you can refinance to access the equity you’ve built up in your home.  Many people do this to receive cash from their equity to pay off debts, perform home fixes or renovations, or to use the cash for some other purpose.

But is it smart to refinance your home?  It’s important to keep in mind that while owning a home is one of the best ways to accrue wealth in many areas of the country, it’s reckless when it comes to your finances to use your home as a piggy bank.  Thinking of refinancing to pay for a quick vacation on a whim?  To purchase that new toy that you’ll tire of in a few months?  Because you’ve got a super huge crush on your loan officer and want an excuse to keep in contact with them over 2-3 weeks?  These are all pretty terrible reasons to refinance (though your loan officer is very flattered by reason #3), and in these cases, we’d advise that no, it is not smart to refinance your home.

Is it smart to refinance your home? As with most things mortgage-related, it depends on your individual scenario.

There are, however, many reasons where refinancing is a good idea.  Restructuring a mortgage to a lower rate can add a ton of cash flow and make things less tight around the house – so as long as the monthly savings offsets any closing costs, a rate reduction refinance (known in the industry as a rate/term refi) is usually a good idea – but keep in mind, the savings has to make sense when you factor in any costs.  Speaking of rate/term refinancing, changing a loan term is also a popular and oftentimes good reason to refinance.  If a current 15 year loan isn’t working because the payment is uncomfortably high, switching to a 30 year term could help.  A 30 year term with no prepayment penalties also gives borrowers more flexibility month over month (for example, if you WANT to pay your loan off in 15 years, you can  by making larger monthly payments – but if you want to put that money elsewhere, the lower 30 year payment gives you that option).  Has your income increased to a point where you can afford spending extra each month?  Maybe moving to a lower rate 15 year term would save you a TON of interest over the long haul, something many home owners take advantage of when planning toward a mortgage-free retirement.

Where things get a little more complex is when cash out, or removing equity from your home, is involved.  Adding to your loan balance at the expense of equity in your home can be extremely beneficial to a home owner, or financially disastrous, so the big thing to consider is “is the money worth it”.  For example, taking $30,000 cash out of your home equity to do upgrades or renovations could both add to your home value and make your life more comfortable – so it might be worth the additional monthly cost.  Taking out equity to pay off other debts is also a common reason to refinance, and also can be great for some people and a terrible idea for others.  For example, if you pay off a bunch of credit cards, take out equity to pay them off, then run them up again, you’re setting yourself up for financial ruin and a deep hole to climb out of.  But if you pay off higher rate debt that’s difficult to pay off with your monthly budget, and then invest the monthly savings back into your mortgage or other smarter financial plans, it can be a great decision.  For some folks, just the increase in monthly cash flow from getting rid of shorter-term, higher rate debt can be a life changing move.  But it’s important to remember it DOES come at the expense of your home equity.  That money might seem free, but it’s not!

Bottom line, the answer to the question “is it smart to refinance your home” is different for everyone.  A good loan officer will guide you through your options and discuss the benefits and pitfalls of what different loan programs would look like.  Refinancing your home is a pretty easy process, and can offer tremendous benefits, but it’s best to move forward with discretion and a complete understanding of what it means for your financial plans.

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So how do lenders offer “no closing cost refinance” loans?  Do these costs just disappear into thin air?  Nope.  The reality is that no closing costs loans are typically loans with higher interest rates – rates high enough for the final investor to offer a dollar amount credit that pays for all of the closing costs.  In simple terms, the lender pays the costs up front for a higher rate, and higher profit, in the long run.  Doesn’t sound like too good a deal for consumers, does it?  Actually, in a market where rates are going down, no closing cost refinance loans are one of the most savvy tools a consumer can use to save money both short and long term.

So how does it work?

A No Closing Cost Refinance can allow you to save money monthly without costing you dollars or equity

Well, in a market where rates are declining, borrowers will be more inclined to refinance their current mortgage – if they do so using a no closing cost refinance, there’s little risk that they’ll lose money on closing costs.  In other words, if they pay closing costs for a lower rate, then refinance again if rates continue to drop, it’s likely they won’t have recouped all of the closing costs from the initial refinance through their monthly savings.  Let’s say the initial refinance costs $3500, and the monthly savings for the borrower was $50.  To recoup that $3500, the borrower would have to hold their loan for 70 months, or nearly 6 years.  If they refinance any time before that, they’ll have lost money.  A no closing cost refinance eliminates that risk.  Even if the rate for the no closing cost refinance is a little higher – let’s say the savings is only $25/month – with $0 closing costs, even if a borrower only has the loan for 2 years, they’ll have saved $600.

In today’s market where interest rates are dipping, a no closing cost refinance option can be a simple and risk-free way for home owners to save money.  With today’s mortgage process being much easier than it was a few years ago for most borrowers, the process itself is also much more streamlined, making the incentive to save money bigger as the process is faster moving and less costly from a time standpoint.

While rate is certainly an important consideration, along with the term of your loan, a no closing cost refinance can eliminate the risk of paying double or even triple closing costs in a market where rates decline substantially.  Nobody knows where the bottom of the market is, or what the lowest rate will be, but if the savings make sense, and you can get those savings without costs, a no closing cost refinance can be a great way to improve your loan and save you money.

Want to see if a no closing cost refinance loan would be the best option for you?  Ask one of our experts today!

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