Should You Refinance

If you are wondering if home equity line refinancing is right for you, you've come to the right place. Here is what you should consider when deciding to refinance your home equity loan.

1. How long do you plan to be in your home? Home equity line refinancing might not make a lot of sense if you plan to move in the next few years. In that case, the costs of refinancing might exceed the benefits. However, if you don't plan on moving for the next five years or longer, home equity line refinancing is probably a good idea.
2. What are the prepayment penalties on your current loan? Some home equity loans carry prepayment penalties, or fees you must pay if you pay the loan off early. Your lender may require you to pay a percentage of the outstanding balance or a few months' worth of interest payments. Before you consider home equity line refinancing, find out what the prepayment penalties on your current loan are. Weigh these costs against the potential savings of home equity line refinancing.
3. What are the costs of the home equity line refinancing loan? Lenders usually charge a number of fees up-front when you take out a new loan, such as application, processing, and origination fees. Find out what up-front fees and charges you will pay on your new home equity line refinancing loan. A good rule of thumb is that fees will usually exceed potential savings unless your new interest rate is at least 0.5% lower than your current one.
4. By how much will your tax savings be reduced? If you use home equity line refinancing to refinance to a lower rate, this means you will not be able to deduct as much interest expense from your income tax. You will probably still save money overall, but your savings might not be as large as you originally thought. Before you take out a home equity line refinancing loan, consult with a tax advisor about possible reduced tax savings.
5. What is the true difference in borrowing costs between the loans? Home equity line refinancing will require you to compare two loans to make sure there is enough of a difference to make refinancing worth your while. Don't just look at interest rates when you compare the two loans. The interest rate fails to take into account the fees, charges, and total interest expense over time of the loan. A better way to compare is to look at the annual percentage rate, or APR, of the loans. This number is expressed as a percentage of the loan's principal and includes the loan's interest rate as well as any fees and charges. Compare the APR of your home equity line refinancing loan with that of your current home equity loan to determine if the savings are worthwhile. If you have any questions, please visit our FAQ page.