For the sake of ease and simplicity, let's just use some basic round numbers in this example: The existing value to be repaid on your mortgage is $200K, and you need $20K cash for something like a hospital bill (or maybe a generous donation to your Tropical Vacation trust fund). You can either obtain a $20K second mortgage at 12% interest, or you can refinance your existing mortgage to $220K at 7%.
• Potential tax write-offs: Suppose your second mortgage from a home mortgage lender was equal to the current value of your home. Based on the Internal Revenue's Service, you've actually taken out a pair of new mortgages. Home Acquisition Debt is simply the first mortgage that you paid off. On the other hand, Home Equity Debt can be calculated by subtracting the first mortgage from the second mortgage. Interest from this amount can also be subtracted from the amount of federal income taxes.
People also often choose to refinance simply to change programs. If a person gets into their home using a balloon payment program, typically within a few years they choose to refinance to move to a safer, fixed rate mortgage. Of course the value of this depends on your overall goals and how long you plan to live in your home, but for many, this is a decision that solidifies future financial safety and avoids the mortgage increases substantially in the future.
Most of us go into a dealership and finance with the dealer when we purchase a vehicle. While this trend is changing, in case you fit that description, there is certainly an excellent chance you could lower your payments. Why? When you finance your vehicle with the dealer, the dealership in several cases marks that rate up to you. You see, the lender gives the dealership a rate you are approved for and then the dealership increases that rate to allow them to earn finance income on your loan.
The first time owner of a vehicle or a home may use this financing option. It can ease some of the problems associated with attaining collateral that we often do not have early in life. This is one of the reasons that a purchase loan is tied with a home equity loan as they are one and the same. The terms may be different and confusing but they equate to the same thing as a home equity loan is a type of purchase loan.
If you think that refinance might be a good option for you to consolidate debt, you should pay special attention to the interest rate and the loan amount since these two issues will determine whether refinancing your home loan is convenient or not. A lower interest rate with a similar repayment program would lower your installments and thus you would have extra money for repaying your debt sooner. The same thing can be achieved if you can get a higher loan amount.