Benefits of Refinancing

Benefits of Refinancing

There are a number of benefits which may be associated with Refinancing a home. While there are some situations where Refinancing is not the right decision, there are a host of benefits which can be gained from Refinancing under favorable conditions.

Some of these benefits include lower monthly payments, debt consolidation and the ability to utilize the existing equity in the home. Homeowners who are considering Refinancing should consider each of these options with their current financial situation to determine whether or not they wish to Refinance their home.

Lower Monthly Payments
For many homeowners the possibility of lower monthly payments is a very appealing benefit of Refinancing. Many homeowners live paycheck to paycheck and for these homeowners finding an opportunity to increase their savings can be a monumental feat.

Homeowners who are able to negotiate lower interest rates when they Refinance their home will likely see the benefit of lower monthly mortgage payments resulting from the decision to Refinance.

Each month homeowners submit a mortgage payment. This payment is typically used to repay a portion of the interest as well as a portion of the principle on the loan.

Homeowners who are able to refinance their loan at a lower interest rate may see a decrease in the amount they are paying in both interest and principle. This may be due to the lower interest rate as well as the lower remaining balance.

When a home is Refinanced, a second mortgage is taken out to repay the first mortgage. If the existing mortgage was already a few years old, it is likely the homeowner already had some equity and had paid off some of the previous principle balance.

This enables the homeowner to take out a smaller mortgage when they Refinance their home because they are repaying a smaller debt than the original purchase price of the home.

Debt Consolidation
Some homeowners begin to investigate Refinancing for the purpose of debt consolidation. This is especially true for homeowners who have high interest debts such as credit card debts.

A debt consolidation loan enables the homeowner to use the existing equity in their home as collateral to secure a low interest loan which is large enough to repay the existing balance on the home as well as a number of other debts such as credit card debt, car loans, student loans or any other debts the homeowner may have.

When Refinancing is done of the purpose of debt consolidation there is not always an overall increase in savings. Those who are seeking to consolidate their debts are often struggling with their monthly payments and are seeking an option which makes it easier for the homeowner to manage their monthly bills.

Additionally, debt consolidation can also simplify the process of paying monthly bills. Homeowners who are apprehensive about participating in monthly bill pay programs may be overwhelmed by the amount of bills they have to pay each month.

Even if the value of these bills is not worrisome just the act of writing several checks each month and ensuring they are sent, on time, to the correct location can be overwhelming. For this reason, many homeowners often Refinance their mortgage to minimize the amount of payments they are making each month.

Using the Existing Equity in the Home
Another popular reason for Refinancing is to use the existing equity in the home. Homeowners who have a considerable amount of equity in their home may find they are able to cash out some of this equity for other purposes.

This may include making improvements to the home, starting a business, taking a dream vacation or pursuing a higher degree of education. The homeowner is not limited in how they can use the equity in their home and may Refinance a home equity line of credit which can be used for any purpose imaginable.

A home equity line of credit is different from a loan because the funds are not disbursed all at once. Rather the funds are made available to the homeowner and the homeowner can withdraw these finds at anytime during the draw period.

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Refinancing with a Line of Credit Loan

Refinancing with a Line of Credit Loan

Some homeowners might consider Refinancing with a home equity line of credit as opposed to a traditional loan. There are definite advantages and disadvantages to these types of situations.

The key to understanding whether or not Refinancing with a home equity line of credit is worthwhile involves understanding what a home equity line of credit is, how it differs from a home loan and how it can be used.

This article will briefly cover each of these topics to give the homeowner some useful information which may help them decide whether or not a home equity line of credit is ideal in their Refinancing situation.

What is a Home Equity Line of Credit?
A home equity line of credit, sometimes called a HELOC, is essentially a loan in which funds are made available to the homeowner based on the existing equity in the home.

However, in this case, it is not really a loan but rather a line of credit. This means a certain amount of money is made available to the homeowner and the homeowner may draw on this line of credit as funds are needed.

There is a specified period in which the homeowner is able to make these withdrawals. This is known as the draw period. Additionally there is a repayment period in which the homeowner must repay all of the funds they withdrew from the account during the draw period.

How Does a Home Equity Line of Credit Differ from a Home Equity Loan?
The difference between a home equity line of credit and a home equity loan is really quite simple. While both loans are secured based on the existing equity in the home, the manner in which the funds are disbursed to the homeowner is rather quite different.

In a home equity loan the homeowner is given all of the funds immediately. However in a home equity line of credit the funds are made available to the homeowner but are not immediately disbursed. The homeowner is able to draw against this line of credit as he sees fit.

There are limits to the amount which can be withdrawn and there is also a limit on when funds can be withdrawn. A home equity has a draw period and a repayment period. Funds can be withdrawn during the draw period but must be repaid during the repayment period.

How Can a Home Equity Line of Credit Be Used?
One of the biggest advantages of a home equity line of credit is that the funds can be used for any purpose specified by the homeowner.

While other loans such as an auto loan or even a traditional mortgage might have strict restrictions on how the money lent to the homeowner can be used, there are no such restrictions on a home equity line of credit.

Common uses of a home equity line of credit include the following:

• Home renovations or improvement projects
• Opening a small business
• Taking a dream vacation
• Pursuing higher educational goals
• Opening a small business

In some cases the interest paid on a home equity line of credit may be considered tax deductible. This may apply in situations where the funds are used to make repairs or improvements to the home.

However, these expenses are not always tax deductible and the homeowner should consult with a tax professional before making decisions regarding which interest payments can be deducted.

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