Todd H. wrote:
"Jan" writes:
Can someone please explain me what would be the better choice
refinancing or home equity lona in getting money from my current home?
What are the tax advantages or disadvantages of these methods. What
would be the cheapest way to go with?

Tax advantages null out. There's really no difference among the two
because, generally, all interest paid against loans on your primary
residence (first mortgage and home equity) are deductible.



It is not correct that all interest paid on loans on your primary
residence are deductible. A mortgage used to buy a property is fully
deductible up to $1mil. However, a home equity loan is only deductible
up to $100K above the original mortgage, as is money taken out of a
refi that is used for anything other than capital improvements. Also,
if he manages to get a home equity loan for more than the value of the
property, which some lenders, will do, the portion of the loan above
the property value is not deductible at all. Nor does the qualifier of
primary residence apply, as the mortgage/home equity deductibility is
the same for a second residence as well.









If what you want is to cash out your equity, the answer lies in these
numbers:
the interest rate you have your current first mortgage at
(generally a fixed rate)

the interest rate you acan get home equity loan or line of
credit at (generally a variable rate)

what your crystal ball says about future mortgage rates, and
your tolerance for the risk that they are likely, historically
speaking to go up before they go back lower

how much cash you need, and for how long

how long you plan to be in your current residence

So, for example, say you have a short term need for a big chunk of
money, but you plan to stay in your house for several more years, and
have a nice 5.125% rate on your first mortgage. In that case, home
equity would generally be a better move here because if you were to
refi the first mortage, you'd be looking at a rate of more around 6%
that you'd be stuck with potentially for the rest of the time you're
in the home. And even if a home equity line was 7.25%, your need
for the cash is short term, so you're likely to pay less total
interest if you stick with your first mortage, and go with a home
equity line or loan for the short duration.


If however, you'll need the money for a long time, or if your current
mortgage rate isn't that hot, a cash out refi may make more sense.
It all comes down to your specific numbers.

Also, as others have pointed out, closing costs on afirst mortgage
are generally higher than for home equity, so be sure to add that
in, in addition to the "total interest paid" calculation.


--
Todd H.
http://www.toddh.net/