Home Equity Loans for Cash Out Home Refinancing

If you bought your house during the time where interest rates were at record lows, leaving your 1st mortgage loan at the current low rate and getting a home equity loan would make more sense than a mortgage refinance. A home equity loan is a second mortgage loan that comes in the form of a lump-sum home equity installment loan (HEIL), or a home equity line of credit (HELOC), an adjustable rate mortgage (ARM) loan that works similar to a revolving credit card account.

Most people know that HELOCs are useful for recurring expenses like having to pay different contractors at separate times for renovations or home improvements. But, did you know it could be a viable alternative to a costly bridge loan for funding the down payment and closing costs on a new home while you're waiting for your existing house to sell?

"A bridge loan takes into account the fact that somebody needs money for a short amount of time to bridge the two closings," says Ellen Bitton, president of New York-based Park Avenue Mortgage. But, bridge loan closing costs can be as high as 2% of the loan amount. A HELOC, on the other hand, can usually be obtained at no cost to the borrower beyond the interest charged on the loan. And, funding could be available within 10 days.

Be sure to schedule the closing of your HELOC before your existing house goes on the market or you may not get the loan. Once your existing home sells, pay off the HELOC balance, but keep the line of credit open so you don't incur a prepayment penalty. Then, you can continue to use all or part of the loan amount during the draw period without having to apply for a new equity loan.

If you need a lump sum for debt consolidation or another one-time, a fixed expense home equity loan may be your best choice. Most HEILs offer a fixed mortgage rate and fixed payment schedule for the life of the loan. But, some have interest only payment options and variable interest rates.

Home equity installment loans can be good alternatives to bridge loans, but they typically take longer to fund than credit lines, and there may be out-of-pocket closing costs. However, there usually are no prepayment penalties, so you can pay off the HEIL once your existing home sells.

Maria is a respected writer from California. She has written hundreds of mortgage finance articles online for BD Nationwide. She recommends the following sites for home equity loans: Home Refinance Loans and Second Mortgages Direct.