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Debt Solutions > Mortgage Refinance > Factors to Consider (1)
Important factors to account for when considering a home equity loan:
- The higher the amount of the loan in comparison to the value of the home, the higher the interest rate you will be charged.
- The interest that you pay on the amount of money that you borrowed up to the value of your home is tax deductible. However,
the amount of money that you borrow above and beyond the value of your home is usually not tax deductible (consult your tax
accountant for advice.)
- Refinancing your home allows you to take debts on which you cannot deduct the interest on your taxes (credit cards, cars,
personal loans,) and convert it into debt on which you can deduct the interest on your taxes. However, refinancing may turn
unsecured debt into debt that is secured by your home. If you fall behind on unsecured debt there is no risk of your property
being taken from you. However, your home is likely to be foreclosed upon in the event of default on mortgage loan payments.
- The closing costs that you pay on your loan can offset the interest that you save. Closing costs may include attorney,
appraisal, recording, title, mortgage insurance, credit report, and origination fees. As a rule of thumb, the higher the loan
amount to the value of the home, the higher the loan costs. Lenders are required to provide you with a Truth in Lending
Statement that demonstrates the effective APR (annual percentage rate). The APR will account for closing costs that you pay
on the loan. Always read the Truth in Lending Statement.
- Repayment options on home equity loans range from 15-30 years. The longer the term on the loan the lower the payment but the
more interest the debtor will pay over time. The terms of repayment on a home equity loan should be as short as the debtor
can possibly afford without risking a payment that is too high and does not allow for security in paying other expenses.
- Beware of loans with pre-payment penalties. Some loans carry penalties that are as much as six months worth of interest if
the loan is paid off ahead of schedule. This means if you were to pay a balance of $30,000 in advance of the scheduled payoff
time, you would be charged an $1800 prepayment penalty. If possible, avoid loans with prepayment penalties.
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