Refinancing Archives - Down Payment Assistance Programs

Home Equity Line of Credit

The HELOC, or home equity line of credit, usually has the lowest interest rate. Don’t fall for this loan just yet, though. Yes, you do get a low introductory rate, but the rate is variable. In other words, it could change from month to month. There’s no way to predict your rate either.

The good thing about the HELOC is you only pay interest on the funds you use. Let’s say you take out a $50,000 HELOC, but you only draw $10,000 of the funds right away. You would then only pay interest on that $10,000. If you leave the remaining $40,000 untouched for the remainder of the term, you’ll never pay interest on those funds.

Home Equity Loan

The home equity loan works a little differently. With this loan, you don’t get to draw funds as you need them. Instead, you receive the funds as one lump sum. You can put the funds in a savings account or some other safe place to use them as you need.

Because you draw all of the funds at once, though, you start paying interest immediately on the full amount. The interest rate charged on this loan is usually slightly higher than the HELOC too. But, your chances of securing a fixed-rate are much higher on this loan. So you may pay a little more interest upfront, but you never have to worry about the rate changing.

Cash-Out Refinance

Your final option is the cash-out refinance. With this loan, you refinance your first mortgage and take out a larger amount. Let’s say you owe $150,000 on your current mortgage, but your house is worth $300,000. You may be able to take out up to 80% of the home’s value with the cash-out refinance. In this case, that means an additional $90,000 for your home renovations.

Lenders take a risk when they give you a larger loan than your outstanding first mortgage. Because of this, the interest rate on the cash-out refinance is usually the highest amongst the three choices. This doesn’t make it the worst choice, but it does mean it will cost you more to keep this loan, especially if you take a 30-year term. The longer you borrow the money, the more interest you will pay on it over the life of the loan.

So do home renovation loans carry higher interest rates? It depends on the chosen loan as well as your qualifying factors. Just like any other loan, lenders base your interest rate on the risk you pose. If you have borderline credit scores and high debt ratios, you may end up paying higher interest rates. If, on the other hand, you have great credit and low debt ratios, lenders may give you access to lower interest rates even on a home renovation loan.

If you own a home, you may not care about the interest rates. Yes, they are rising, but you are in your home, so it doesn’t matter. But does it? Higher interest rates do affect homeowners in several ways. Keep reading to find out how.

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Refinancing May not be Possible

First, you may be stuck in your current mortgage. Depending on how high rates get, it may not be worth it to refinance. This means a few things:

You may be stuck with your current term
You may be stuck with an adjustable rate loan that could adjust drastically
You may not be able to tap into your home’s equity

If you are stuck with an ARM loan, that could get risky. Your ARM loan is tied to an index. Your adjusted rate depends on that index every year. If rates keep rising, you may find yourself with an unaffordable interest rate. If you didn’t already find out the worst-case scenario for your adjusted rate, now’s a great time to find out before it’s too hard to refinance.

Perhaps the largest downside of rising rates is the inability to tap into your home’s equity. If you want to make home renovations, pay for college, or just need an emergency fund, you may not be able to get to your home’s equity. It depends on the interest rates at the time. A home equity loan or line of credit may not be too hard to get, but refinancing your first mortgage in an increasing rate environment can be more difficult, not to mention costly.

Home Values May Fall

Interest rates and home values aren’t directly related, but one can affect the other. If interest rates continue to rise, the housing industry may naturally slow down. As it becomes harder to qualify for a loan, fewer people buy homes. With fewer homes moving, home values naturally decrease.

A lower home value could affect you in a couple of ways:

You’ll get less money for the home if you sell in the near future
You won’t have as much equity if you need/want to refinance

Rising interest rates could affect you in an indirect way. Unless you plan to keep your home and your mortgage for the remainder of its term, changing interest rates could affect you in ways you never saw coming.

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Your Home May be Harder to Sell

Rising interest rates also affect your ability to sell your home. Higher rates make it harder for borrowers to get a loan. With fewer qualified buyers coming through, your home may sit on the market much longer than you anticipated.

Even if you do find a buyer, you may find yourself agreeing to a lower price than you anticipated. Whether your home sits on the market for a long time and you just want to get rid of it, or you need to go lower to make the mortgage more affordable, you could find yourself stuck.

How Will Rising Rates Affect You?

Stop and think for a minute about your situation. How much time do you have left on your mortgage? Is your payment affordable as is? Do you have equity that you may want to tap into? If you have any idea of making a change, consider doing it soon. This way you can take advantage of the lower rates before rates increase.

If you don’t think you’ll stay in the home or you won’t tap into the home’s equity, then you have decisions to make. If you want to sell, you may consider doing it sooner rather than later. Higher rates could make it harder to sell your home or leave you with less profit than you anticipated.

If you’re happy where you are at and are happy with your current mortgage payment, you can leave things as is. Just know that you may need to ride out the storm of rising interest rates for a while. Constantly stay aware of the mortgage interest rates and what they are predicted to do in the near future. You can then make an informed decision and not find yourself stuck with a mortgage that you don’t want, but with nowhere else to turn.

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Best Ways to Finance Home Improvements