Refinancing and Home Equity Lending
Consumers have chosen to restructure their home financing with greater and greater frequency over the past decade. One significant factor has been the low interest rates offered during this period of time, often hovering at or near 40 year lows. Other non-interest rate related factors continue to include the need to replace short term financing, a restructuring of overall personal debt, obtaining cash for home remodeling, obtaining cash for making investments in other real estate or other forms of investing as well as for other personal reasons.
In the lending community, we typically categorize these different mortgage restructurings into the following categories:
Rate and Term Refinancing –This example is a straight refinancing of the existing mortgage debt on the subject property. The result is typically a lower monthly payment with a resulting new loan balance that is the same or only slightly higher than the old balance. Many borrowers choose to finance any closing costs and pre-paid expenses that apply to the transaction and still end up lowering their monthly payment, sometimes very significantly. Benefits obtained by the home owner are generally a reduction in overall interest expense and/or going from an adjustable rate mortgage to a fixed rate mortgage, or vise-versa depending upon how long the home owner may or may not be projecting to own the subject home.
BACK TO TOP ^
Cash-Out Refinancing –There are many reasons to increase the amount of mortgage financing on your home. One of them
is for home improvement projects (see also Home Equity Lines of Credit). Others include freeing up cash to be able to place into other investments or to reduce monthly cash-flow requirements by consolidating consumer credit into mortgage financing. Consolidating debt can be a useful tool that reduces monthly minimum payments and possibly also reduces overall rates of interest paid. In addition, interest paid on mortgage debt is in most cases tax deductible, whereas consumer debt is not.
BACK TO TOP ^
Secondary Financing Options
Fixed Rate Secondary Financing –Similar to a first mortgage with a fixed rate, fixed rate seconds can come in 10 through 30 year amortization options, and can also be available as a balloon product (for example, amortized for payment purposes as if paid over a full 30 year term, but with a lump sum balance due after 15 years - called a '30 due in 15'). Unlike home equity lines of credit, fixed rate seconds require the full balance be used at inception. They can be used in combination with a first mortgage, whether on a purchase or a refinance transaction. They can also be obtained on a standalone basis, independent of a first mortgage transaction. When adjustable rates are higher, many consumers choose fixed rate financing. When adjustable rates are lower, many choose home equity lines of credit.
BACK TO TOP ^
Home Equity Lines of Credit –Typically based upon the Prime Index, as reported through the Wall Street Journal, home equity lines of credit, or HELOCs, are adjustable rate seconds. They are unique in mortgage lending in that they act as a revolving line of credit during the initial draw period, and then become a termed out loan at the end of the draw period. Draw periods typically have a duration of five years, most with a renewable option of an additional five years, with a 10 to 15 year amortization after that point. During the draw period, the balance can go up and it can go down as the line balance is utilized and/or reduced by the borrower. The minimum payment during the draw period is the monthly interest based upon the last month's balance, which could be anywhere from a zero balance to the full line limit in balance.
BACK TO TOP ^
View commonly used mortgage definitions and references
|
