Mortgage Consolidation and Home Equity Loans – What is a Refinance Mortgage?
One of the misconceptions that new home buyers often have is that a refinance mortgage or a home equity loan is the same thing. But it’s not. Here’s why.
A refinance mortgage works like this: You make a pre-approved, pre-committed mortgage payment, usually in the form of a home equity loan. The lender will use your payment to create an amount that can be used to make the loan and you pay the lender a few dollars. The lender then uses the excess funds from the loan to pay off the loan, so you end up paying less.
The only difference between a refinance mortgage and a home equity loan is that a refinance loan is much easier to get than a home equity loan. A home equity loan typically requires that you have a high-ratio mortgage, meaning that your current mortgage is of a higher rate than your home. In order to qualify for a home equity loan, you must also have equity in your home. While this might sound similar to a refinance mortgage, it really isn’t because the two are not even remotely similar.
First, with a refinance loan, your credit score does not necessarily improve as much as if you had taken out a home equity loan. However, this isn’t an indication that you won’t qualify for a mortgage if you have a poor credit score.
You still need to meet all of the criteria needed for a refinance, but the lower payment makes the total loan amount more affordable. Also, it allows you to make a smaller down payment. This means that a refinance mortgage has a much better chance of being approved.
A home equity loan is essentially a second mortgage. When you refinance your mortgage, you’re taking out a new loan to repay the original loan that you took out. This is especially true if you get a low-ratio mortgage and were able to obtain a small loan with a low rate.
In general, the cost of refinancing your home loan is more than the interest rate on your equity loan. So, the monthly payment will be more expensive. Of course, you also have the option of making up the difference through a home equity loan.
One other thing that people may not understand is that if you refinance your mortgage, your credit score is going to be negatively affected, but it’s not as bad as having no mortgage at all. Although the negative impact is more pronounced with a refinance, a negative score does not stay permanently. After you’ve made at least one payment, your credit score will begin to stabilize and move back up to a good rating.
An important thing to note when you compare a refinance mortgage to a home equity loan is that a refinance loan can only be made with the home as collateral. With a home equity loan, you can borrow any amount without requiring collateral. So, if you fail to pay your home, your home’s value will be decreased.
Remember, if you are making all of your monthly payments on time, it will take you longer to save up enough money to cover the new loan. If you are missing one or more payments, you will be charged fees, penalties and interest. Then, when the new loan comes due, you will pay all of the added fees and penalties, which will still leave you worse off than if you had gone ahead with a home equity loan.
To summarize, the goal of any home buyer is to buy a home at the right price, where it is most appropriate for the financial situation in which they find themselves. If you have been in debt for many years, you would be well advised to consult with a mortgage broker or a financial planner about refinancing options.