Refinancing Home Equity Loans

Refinancing home equity loans is a way to bring down monthly bills and avoid paying such high interest rates. Equity loans are generally shorter term and carry a higher rate than a standard mortgage, but there are several ways to mitigate the expense.

The first option is to simply request a refinance of your equity loan at a lower rate. This is more likely to succeed if rates have dropped and refinancing is on the rise. However, realize that if you pay large up front fees or many document, preparation or other fees (even if they are rolled in) for your refinance, you may not really end up saving much money.

For example, suppose your current loan is set up as follows:

• Balance owed on your equity loan: $10,000
• Term of the loan: 5 years at 7.5%
• Monthly payment: $200.38 a month
• Total amount in payments: $12,022.80.

• Balance owed on your equity loan: $10,000
• Term of the loan: 5 years at 5%
• Monthly payment: $188.71 a month
• Total amount in payments: $11,322.60
• Refinance fee: $750.00
• Real total paid by end of loan: $12,072.60

What looks like a savings of $700 at first ends up being an extra cost of $50 over the life of the loan. This is why it is important to do the math, and make sure fees charged to refinance don't end up costing you more than staying with the original agreement.

A better option if you are in position to refinance your main mortgage is to roll your home equity loan into a full refinance, eliminating a higher interest rate.

If you can afford to continue paying out the same total amount per month, you may consider having your single payment be the amount of the two prior loan payments combined. With a lower interest rate, more of your money is going towards principal meaning your loan will be paid off sooner.

Another option for refinancing can allow you to cash out extra equity - for example, if you have $10,000 equity and took out an equity loan for $5,000, you may wish to refinance your loan and roll it into an larger loan if need arises rather than doing all the qualifying and paperwork for a third, brand new loan.

Refinancing can also be done to acquire more years to pay off your loan. If payments are too high and immediate relief is needed, stretching the loan term to ten or fifteen years can help reduce monthly bills and make life easier. However, unless an substantial interest rate reduction is also obtained, the total amount paid will actually increase over the life of the loan.

The bottom line is, refinancing home equity loans is activity which should be negotiated with care to ensure you are receiving a real benefit from the action. An attorney can review refinance papers with you and ascertain whether or not a refinance is in your best interest.

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