debt

Refinance with a home equity loan?

Banks can offer a streamlined application process for home equity loans, with a quicker closing to suit borrowers' needs. Some home equity loans can be closed in as little as seven days, bankers say. And banks don't typically require private mortgage insurance on home equity first liens as well, even when the loan-to-value goes above 80 percent.

Disadvantages

One factor that might deter borrowers from leaning toward a home equity loan refinancing is that there are fewer product options with this strategy. Herpers notes, "We only offer a fixed-rate, fixed-term standard amortizing loan at one price point per term. The customer can't pay points to buy down interest rates. U.S. Bank and most banks don't offer (adjustable-rate mortgage) products (or) interest-only products. We don't cater to large loan sizes."

Some home equity loans have prepayment penalties if they are paid off within three years of origination.

Regulatory impact

Some of the advantages that a home equity refinancing offers might be evened out due to the impact of government regulation. For instance, a few years ago, banks did not need to escrow for home equity loans. However, two years ago, regulatory changes made escrowing mandatory for certain home equity loans, according to Herpers.

He says, "The differences in the home equity versus the mortgage are getting less and less apparent. The reason for that is the regulation that is coming out of Dodd-Frank. Those laws don't distinguish between a closed-end home equity and a mortgage. One of the big benefits was lower documentation. Dodd-Frank is now going to require, in many cases, a similar level of documentation on a home equity as on a mortgage."

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