Question by Mama J: What’s better a mortgage refi or a new equity line of credit?
I have a rockin’ 5.5% mortgage interest rate and I also have a small but maxed out equity line of credit. I’m looking to clear out some debt so that I can become a stay at home mom. I can either refinancing our mortgage to pull out $ $ in order to clear out the debt but lose the nice 5.5% interest rate to something like 6.5% OR I can open a new line of credit for just the amount that we need to clear the debt, of course that interest rate would be a bit higher. I’m siding with the line of credit only because if I ever came across some money, I can pay it off. But my husband would rather add it all to the mortgage, for some inexplicable reason. I would like to hear pros and cons and if anyone has ever done this before.
Answer by hin368
well the one good thing about an open line of credit is that your equity in your home is still safe and available in case of a major emergency so if the small line of credit is available use it safe some of that money to even pay that back since you are getting rid of debt then you income should increase good luck
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The bank will crunch the #s for you.How long you have left on the mort,how much you want to pay off,or pull out as you said,and how much you can offset costs with tax deferred savings….But historically,anything under 7 % is good
I think you are best to leave the 5.5% note in place and get an equity line. Most of the time, banks will pay the closing costs on equity lines and have a low introductory rate. If you refi the entire amount, not only will you lose that rate, but you will have to pay the closing costs as well. Closing costs will include, title insurance, appraisal fee, lender fees (maybe as much as 1% of the loan amount), mortgage recording fees, etc.
It really depends on what interest rates are doing. If interest rates are falling, and you can save 2 percentage points, and you can keep the remaining term the same, then a refinance is better. By ‘keeping the remaining term the same’ I mean that you don’t make your payoff date later than it was originally. For example, if you got a 30 year mortgage July 1, 2000, your payoff date would be June 30, 2030. If you refinanced July 1, 2015, you would want the new mortgage to be a 15 year mortgage so that your payoff would still be June 30, 2030.
With rising interest rates (what we have now), an equity line of credit is better because:
1. The bank will frequently pay all closing costs. You may be required to keep the line of credit for a certain # of years. This does NOT mean that you have to have a balance — you just don’t close the line when it’s paid in full.
2. The interest on a refinance is based on the ENTIRE mortgage. The interest on a line of credit is based on only the incremental amount you borrowed. With a standard 30 year mortgage, you already pay, in interest, TWICE the cost of your home. Refinancing frequently extends the pain because you also extend the term. You’ll pay enough extra interest to buy your house a third time.
Do the math. Work this out both ways. Generally, with the same or higher interest rates, you will come out better with an equity line of credit.
It all depends. You need somebody to crunch the numbers with you. You need to compare 3 scenarios to make a right choice.
1st: Current 1st Mortgage payment + Current Line of Credit payments + all credit card and other payments.
2nd: Current 1st Mortgage payments + New Line of Credit (this one will pay off the previous line of credit, other debts and maybe leave some credit available)
3rd: New 1st Mortgage payment.
You need to take into account that the Lines of credit are adjustable and that anytime the Prime rate rises, your line of credit rises, and in some cases you are paying interest only.
I will advocate a new 1st Mortgage that pays off all your debts and current line of credit, and take out a new line of credit (since it has not cost, you should always have this as an emergency account only, remember Cash is King)