Home Should you consider refinancing your home equity loan? Because of the flurry of real estate prices jumping up so high during 2004 to 2008, a number of folks took advantage of their home equity to finance other needs. This taking out of value occurred in one of three ways: selling the house, borrowing via a second mortgage, or borrowing through a home equity line of credit (HELOC). However, now that the market has corrected itself (some would say significantly), some are finding a need for or asking if refinancing such borrowing is possible. It is. Much depends however on one's individual situation. Background Just as home equity loans were a great way to provide yourself the benefits of additional credit without the hassles of a credit card company, refinancing equity loans is also now coming into vogue. Much of this has to do with the absolutely historical drop of market interest rates down to 4.5% or lower for real estate financing. A primer is needed, however, just to keep track of what's going on here. First, let's define equity real quick. Owning your home really involves buying a home in one of two ways: either you paid for it in cash, or your borrowed someone's money to buy the home. If you borrowed, you created what is called a mortgage, a home loan. You were also required to put down a down payment to make sure you were serious. The difference between the total price and your mortgage at first is usually that same down payment. That is the beginning balance of your home equity, or true ownership in the house. The bank owns the remainder until you pay off your mortgage balance. However, a funny thing happened while paying a mortgage. Market forces will push a home value higher or lower, depending on what's happening with the surrounding neighborhood and demand for homes in the area. If your home value increases from the time you bought it, then the value above the mortgage balance is your equity, even if it far exceeds the original balance you provided as a down payment. For example, you buy a home for $200,000 with a down payment of $10,000. Your equity at time of sale is $10,000. The bank owns $190,000 of the house based on the mortgage balance. However, if a few years go by and the house is worth $350,000 due to market forces and your mortgage balance is now $180,000 from paying it down, your equity is now $170,000. This is a pretty crazy concept since the additional value is made up by perceived market forces. However, this is exactly how people were able to pull out equity and build pools, buy $50,000 trucks and SUVs, and buy additional homes with $100,000 down payment. On the other hand, if the market forces drop, then the equity disappears. This also includes whatever down payment was paid. So, using the same example, if a house was bought for $200,000 with a $10,000 down payment the bank owns $190,000 at time of sale. If after a few years the home value drops to $150,000 due to a bad neighborhood and the mortgage balance is $30,000, then not only did the owner lose the $10,000 down payment value but he or she is also $30,000 "under water" or in negative equity territory. Obviously, no money can be borrowed in such a situation. And the "under water" scenario can be exacerbated when people borrow far more than their home's worth and the market crashes right afterwards. Limitations Benefits & Drawbacks Beware of Scams Privacy Policy