Home Equity Loan - Case Studies
John wants to borrow $30,000 from the equity he has in his home
to make home improvements. Mortgage rates have dropped 4% since
John took out his mortgage and he has $100,000 left on his mortgage.
Should John get a home equity loan or should he refinance his first
mortgage and use a 'cash-out' option to get the money he needs for
his home improvements.
Analysis: Even if John did not want any money for home improvements,
he should most likely refinance his first mortgage. As a rule of
thumb, if mortgage rates have dropped two 2% or more since you have
taken out your mortgage, it most often makes sense to refinance
your mortgage. Factors that may not allow refinancing to be a viable
option include: 1) a pre-payment penalty on your mortgage, 2) a
small amount left on your mortgage which may not result in enough
benefit to offset refinancing costs.
Since rates have come down sharply since John took out his first
mortgage and he still has a sizable mortgage to pay off, John should
refinance his mortgage. If he also wants to borrow from the equity
he has in his home, cash-out refinancing is a sensible option.
If John was to 'cash-out refinance', John would take out a new
mortgage for $130,000. He would pay off his current mortgage of
$100,000 and the $30,000 that he has left over would be the equivalent
of a home equity loan. John would therefore lower his mortgage rate
and the $30,000 he has borrowed from his home's equity would also
likely be at lower rate than if he were to take out a separate home
More Related Information On...
cash-out refinancing - see Cash-out
refinancing, Types of
home equity loans
choosing a type of home equity loan - see Which
home equity loan type is right for me?, Types
of home equity loans
More Case Studies:
- Using home
equity for debt consolidation: Tony wants to use the
equity he has in his home for debt consolidation but he is unclear
about the advantages and disadvantages of doing this. If borrowing
from his equity is suitable for his situation, what type of loan
should he get?
- Using a
home equity loan for home improvements: Charlene and
Russell are considering borrowing from their home equity to make
home improvements. They have a rough estimate of costs and they
plan on doing the work over the next year. What type of loan is
right for them?
you use the equity in your home to buy a car? Christine
wants a new car but she has no savings. Should she use a home
equity loan to buy a new car?
of accepting a loan offer. Milton is thinking of accepting
a home equity loan loan offer. How will this affect future selling,
future home equity borrowing and what will be the tax implications?