Mortgage refinancing can make good sense if you want to make improvements on the house, pay those college fees, or pay-down higher-interest loans. Frank Nothaft explains that “home equity loans are typically linked to the prime rate … many home equity loans have rates that are 1 percent or more above the prime rate” and, by comparison, “most 30-year first mortgages are typically below prime”. The interest rate for a typical home equity loan needs to take several factors into account: the risks to the lender, the duration of the loan, the flexibility offered to the borrower, and the amount of the loan in relation to the amount of equity available (referred to as the Loan to Value (LTV).When you got your first mortgage you put your home up as collateral against the loan. Essentially, the mortgage company is confident that they’ll get their money back if you default. The term, or duration, of a home equity loan is usually far less than that of a first mortgage. A standard home equity loan is effectively a second mortgage, and can be a fixed or adjustable rate mortgage. The mortgage company doesn’t have your custom for the long-haul, and it takes this into account when setting the interest rate.
Even so, this kind of mortgage can be far cheaper than the interest rates on credit cards or unsecured loans.
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