Home Equity Advice

A. What Determines the Interest Rate?
A Home Equity Loan can be a beneficial way of taking out cash from the equity in your home in order to pay off high interest rate credit card bills, or to do home improvements, or for a child's education, or to pay off other unexpected costly expenses.

One benefit of a line of credit is that because it is a second mortgage on your home the interest paid on this loan is tax deductible.

Equity lines are always adjustable loans that are determined by the interest rate of the Federal Reserve. When the fed raises rates your equity line will also be adjusted to a higher interest rate.

B. Equity Line Vs. Cash Out Refinance
When determining a strategy that best suits your personal financial situation you might run across a dilemma where you have to decide on whether to take out a home equity line of credit or refinance your entire mortgage and take extra cash out.

The most obvious time to refinance and take cash out is when you can reduce your interest rate on your 1st mortgage, take out extra cash and still keep your payment close to the payment of your current loan program.

If you are the type of person who enjoys the security of a fixed rate mortgage then a cash-out refinance might be the better choice. In this scenario, you have a higher loan amount on your 1st mortgage, but do not take a risk that the Federal Reserve will continue to raise rates until your equity line of credit is adjusted to a far higher rate. This is especially relevant today because good risk borrowers can get a loan in the 5.5% - 6% range while the current rate on Equity Lines is already at 7% and will likely continue to rise in the near future.