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There are many reasons a homeowner may want to refinance the loan on their home. This is attractive to homeowners who are searching for a way to lower their monthly payments. It also is appealing to individuals who want to pay off their home loans quicker. Should a homeowner want a lump sum of money using their home as security, they may be interested in a home equity loan. It’s important to weigh all the benefits against any possible disadvantages for both.

Refinancing

This enables homeowners to refinance their home loan to a lower interest rate. It also can provide a homeowner with more acceptable mortgage terms. In this situation, a financial institution will pay off an existing home loan and then provide a new mortgage. Once eligibility for refinancing is established, a homeowner can compare offers from different financial institutions. Refinancing is also a good way for homeowners to build up equity in their home faster. This can happen even as a refinance loan provides lower monthly mortgage payments.

Home Equity Loans

According to the Federal Trade Commission, this is a loan for a specified amount of money. This loan is based on having a home used as security to obtain the loan. A home equity loan is able to be repaid using equal monthly payments for a specified term. This is much like how a homeowner will pay their mortgage. The amount an individual can borrow for a home equity loan is usually 85 percent of their home’s equity. The ability to secure such a loan will depend on a homeowner’s credit history, their home’s market value and more. Should a homeowner fail to repay the loan, the lender is able to foreclose on the home.

Credit Scoring

If a homeowner chooses to refinance their mortgage or take out a home equity loan, credit scoring will play a role with a financial lender’s decision. This involves the homeowner’s bill-paying history. It will cover outstanding debt, late payments any collection actions and more. A financial institution will compare this credit history with others in a similar profile. A credit scoring system will then be used to determine points. This helps a lender determine who is most likely repay their loan on time.

Insufficient Equity

There may come a time when a homeowner does not have very much equity in their home but is in need of a loan. This could make it difficult for them to obtain a loan from a qualified lender. Should a homeowner be current in their loan, this can qualify them for certain government lending programs. A common government sponsored program is known as HARP. It is designed to help homeowners who have low loan-to-value (LTV) ratios. They can qualify if they have limited delinquencies a full year prior to refinancing and their LTV is 80 percent.

Home Equity Loan Benefits

According to Mortgage Calculator, a person is in need of immediate funds will find a home equity loan provides lower interest rates than other types of loans, as well as credit cards. It’s also possible for a homeowner to deduct the interest paid on a home equity loan on their taxes. A home equity loan will provide a lump sum of money. This enables a homeowner to pay off a number of different type of debts. Many homeowners use these funds for home improvements. This could increase the value of the home and pay for any expensive repairs. These funds are often used for debt consolidation. They can be used to consolidate credit card and other debt into one small monthly payment with interest that is tax deductible.

Refinancing Benefits

One of the main benefits a homeowner experiences from refinancing is a reduced interest rate. This will decrease monthly mortgage payments. During a homeowner’s working career, they will likely experience an increase in their income. Having a lower interest rate and lower monthly mortgage payment will increase their credit score. It may cause a homeowner to save hundreds of dollars a year. This can also be used to eliminate a balloon payment at the end of a mortgage loan. Private mortgage insurance (PMI) can also be eliminated. The purpose of PMI is to protect lenders from borrowers who appear to have a high chance of defaulting on a loan. This can be eliminated after refinancing if agreed to by the mortgage lender.