Refinance Home Equity Mortgage

Get more cash and refinance your 2nd mortgage with a fixed interest rate. That is what so many borrowers are doing with a refinance to shorten the term of the mortgage. And brace yourself, even at low rates, a shorter term means a higher monthly payment. The benefit is that you'll build up equity faster and pay far less in total interest over the life of the loan.

Consider Jim Neill, 48, a real estate broker and his wife Merrilyn, 55, a psychotherapist. Recently, the couple took out a 15-year fixed rate loan at 6.75% to replace an 8.13% ARM with a 30-year term. Their monthly payment jumped by $200, but now they will own their own home outright by the time they retire. In addition, the total interest on the 15-year loan will come to $95,447, vs. $222,234 on the remaining life of the ARM -- and that assumes their adjustable rate would have held steady at its current 8.13%. "This is forced savings," says Jim. "When we retire, we can scale down and take equity out of the house."

If you can't afford the payments on a 15-year mortgage, your next best means of building equity is to refinance for less than 30 years. To do so, ask your mortgage company to customize your new loan's term to match the years that are left on your old loan -- if you are five years into a 30-year mortgage, for example, ask for a 25-year loan.

If you're looking for additional home equity refinance options, consider a Cash-out option!

Cash-out Refinancing
While cash out refinancing is not a type of home equity loan, it does allow you to borrow against the equity in your home. In cash out refinancing you take out a new mortgage that is greater than what you owe on your current mortgage - you pay off your current mortgage and use the difference as a home equity loan.

Here is an example of cash out refinancing. Your home is valued at $150,000. Your mortgage is $100,000 and you have $50,000 worth of equity in your home. When you bought your home, you got the going mortgage rate which was 9%. Interest rates have since come down and you decide to take advantage of the lower rates and also borrow $20,000 from your equity for a home improvement project. You take out a new loan for the $120,000 at 6% - you use $100, 000 of that to pay your old mortgage and $20,000 for your home improvement project. You now have a $120,000 mortgage at 6% where as you previously had a $100,000 mortgage at 9%. The difference of $20,000 is the way in which cash out refinancing replaces a home equity loan.

Cash out refinancing typically has a lower interest rate than a home equity loan but closing costs associated with cash out refinancing are higher than closing costs associated with a 2nd mortgage.