Equity credit limit or refinancing?

Is it MORE sensible to get a home equity credit line? Or refinance your existing home equity loan with a higher interest rate than you currently have?
This is a big question. And the answer is not always the same. It depends on many factors, including 1) How much equity are you looking for? 2) What will you do with the equity? 3) What is the current amount of your loan? 4) Will you qualify for a home equity credit line? 5) What is the interest rate you will receive for a home equity credit line? The answers to these questions will help you make the right decision, because sometimes, refinancing your first cash loan at a higher interest rate than you currently have IS the right answer! And if you can not figure it out on your own, then call me as I face these scenarios all the time!
Let me give you a script, but realize that each script works based on its value:
Suppose you owe $ 250,000 right now on a first mortgage. The current interest rate is 2.875% at a fixed 30 years. The payment of capital and interest is $ 1141 (based on an initial loan of $ 275 thousand). The estimated value of your home is $ 500,000. You are interested in paying off all your $ 65,000 credit card debt and upgrading your home using an additional $ 75,000. SO, the total amount of cash you would like is $ 140,000. What is the right move?
Let’s look. We answered the first 3 questions. We should identify # 4 and # 5. Do you qualify for a home equity line of credit? Not every lender provides autonomous home equity credit lines. Banks generally do, but here is the rubbing in the banks. They are VERY conservative in terms of value AND conservative in terms of debt-to-income ratios. So… although there seems to be a lot of equity (first loan $ 250,000 + mortgage loan $ 140,000 = $ 390,000 total divided by a value of $ 500,000 = loan at a value of 78%), banks generally allow up to 80% loan in value at HELOCS… but suppose they value the property for $ 475,000 for example. This will make the loan worth 82% and you may not be lucky !. But suppose the bank estimates for $ 500,000, what interest rate will you get? Assuming your FICO rating is excellent (let’s use 750), the HELOC interest rate is determined by adding the Current Primary Interest Rate plus a margin (risk) set by the bank. The Prime Rate today is 3.25% and let’s say that the margin set by this bank is 1.25%. So your starting percentage will be 4.5%. The Fed meets every 6 weeks to determine if the base price needs to be adjusted and when it adjusts, the HELOC value adjusts with it. It is NOT a fixed interest rate. is variable. Now that we know the interest rate, the payment of capital and interest will start from $ 709 per month ($ 140 thousand at 4.5%).
Therefore, we have determined that you are currently paying $ 1141. And with a new HELOC, your payout will be $ 709. Total payment $ 1850. Are you fit? Banks use stricter debt-to-income ratios for HELOCS (generally up to 43%) than a regular loan (generally up to 49%). But let’s assume you qualify. The next question is, what would be your payment for a single loan refinancing? Suppose your new interest rate at a fixed 30 years will be 3.5%! But your current percentage is 2.875% !! Let’s continue with the analysis. The capital and interest for a new loan of $ 390,000 (current 1st from $ 250,000 plus $ 140,000 in cash) will be $ 1751! In relation to $ 1850 maintaining your current loan and adding HELOC. In fact, you would save almost $ 100 a month just by taking the 3.5% interest rate AND… because it is a FIXED INTEREST RATE, you do not have to worry about raising the HELOC as the Fed adjusts the key interest rate!
In this scenario, it makes more sense to redefine 3.5% instead of maintaining the current rate of 2.875% and add a HELOC starting at 4.5%! Every scenario is different, so call me to work the numbers for you! Contact me at 661-705-2500!

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