Home Equity vs. Refinance
Home equity in the property of a person is normally calculated as the market value of the property minus the mortgage amount or the home equity loan. That is to say, home equity is the residual amount after the mortgage debt on the property. When we have to consider the pros and cons of home equity vs. refinance, it would be better to have certain data beforehand, so that the right decision is arrived at.
It is very common nowadays in the United States to obtain home mortgage loans up to 100% of the value of the property. In some cases, loans have been granted even for amounts up to 125% of the property value. Under such circumstances, there is very little chance of utilizing the home equity value for raising further amounts and there is no question of considering the possibility of home equity vs. refinance.
It has to be remembered that the borrower starts analyzing the option of home equity vs. refinance, only when he is in default of the mortgage loan or when he feels that he would not be able to pay the monthly installment amounts in full. The only avenue open for the borrower is to go in for refinance for loans where there is no home equity left. Invariably, this is done either by opting for a loan with lesser interest rate or by choosing a longer repayment period. Both these alternatives reduce the amount of the monthly installments.
Still, extending the period of repayment of the home loan is the better option of the two, because the reduction in the monthly installments payment is likely to be more substantial, compared to the procurement of a loan with lesser interest rate. This is due to the fact that the difference between the existing interest rate and the newly negotiated interest rate would normally be very nominal. If we take into consideration that the Fed interest rates were at 1% before June 2004 and have since been hiked to 5.25% for now, the chances of getting a better interest rate are quite bleak. As such, the best course in deciding the question of home equity vs. refinance is to go in for a refinance of a longer term.
If a borrower has already taken a loan for a period of 30 years, the issue of home equity vs. refinancing does not arise at all. The borrower has to plead for debt settlement with the lender. Or else, he can file for Chapter 7 bankruptcy protection. It is always better to anticipate future real estate market trends and go in for a mortgage loan that is flexible and one that would suit the income of the homeowner.