How to Save Money on House Payments
Tuesday, June 5, 2018, 6:00 AM | Leave Comment
If you’re trying to pay your mortgage on a fixed income, dealing with unexpected medical bills and high credit card bills, or suddenly have fewer resources due to the loss of a family member or job, there are ways to help you pay your mortgage.
You can always rent out a room in your home or take a side job if necessary, but if that’s not possible, refinancing is an option.
Refinancing a mortgage means that you are taking out a new loan with lower interest rates to pay off your current loan. Lower monthly payments free up cash you may need to pay your other bills. Some homeowners also want to refinance because they want to get rid of their variable-rate mortgage in exchange for a fixed-rate loan. The interest rate is locked in and stays the same over the life of your loan.
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Cash-Out Refinance
You can refinance your current mortgage with what is called a cash-out refinance loan. According to Zillow, the “new mortgage is for a larger amount than the existing mortgage loan, and you (the borrower) get the difference between the two loans in cash. Basically, homeowners do cash-out refinances so they can turn some of the equity they’ve built up into their home into cash.”
You can take the difference in cash to make home improvements, for example, or you can use the cash at your discretion. Cash-out refinancing is good for people who have a considerable amount of equity built up.
Let’s take a look at how a typical cash-out refinance program might work: If you have a home worth $250,000 and you owe $150,000, you have $100,000 in equity. If you wanted to take out $50,000 in cash for home improvements or debt consolidation, this amount would be added to the total of your new loan. Your new loan would be $200,000.
“There is a limit on how much you can borrow,” according to LowerMyBills.com. “For most cash out refinances, the limit is usually 85 percent of your equity. Cash out refinances typically have a fixed interest rate, so you will not have any surprises. You will have the same monthly mortgage payment every month.”
Also, don’t forget closing costs. Let’s say you have $10,000 in equity; you only can get $8,500 because closing costs are about 2-5 percent of your loan.
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Home Equity Loan
Similar to a cash-out refinance loan, a home equity loan allows homeowners to get a lump sum to be put toward debt or high-dollar purchases. Some lenders will let you borrow up to 90-95 percent unlike a cash-out loan. Home equity loans’ interest rates and monthly payments are fixed.
As mentioned, a cash-out refinance has closing costs that could add thousands of dollars. “However, you may be able to avoid these costs with a home equity loan where zero cash is required at closing,” according to Discover.
With a cash-out loan, you’re replacing your current mortgage under new terms. With a home equity loan, you are either refinancing your current loan with new terms or securing another fixed-rate loan, or a “second mortgage.”
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HELOC
A home equity line of credit lets you to tap into your home’s equity. You do not receive a lump sum of money. Instead, you get a line of credit, similar to how a credit card works.
You can either write checks or use a specific credit card to buy things. You only have to pay back the money that was borrowed. Unlike other types of loans, HELOCs have a variable rate, interest only payments for a certain amount of time, and a 10-year period (known as the “draw period”) in which the homeowner can access the funds. The advantage of this type of loan is that you don’t have to use what you were awarded and your monthly payments will be lower as a result.
As you can see the main differences between a home equity loan and a HELOC are the interest rates (fixed vs. variable) and the repayment options and policies.
If those options don’t sound appealing, some people decide to downsize and move into a smaller, more affordable home, yet still live comfortably. But before going that route, you should weigh the pros and cons of each type of loan. Shop around for the best interest rates and terms available to meet your financial goals.
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