Refinancing is used to pay off your previous mortgage with a new mortgage. Ideally, the new mortgage should be at a lower interest rate. Many homeowners refinance after they’ve improved their credit score in order to lower their monthly expenses. This can make it a bit easier to balance their monthly bills and may allow them to set aside money over time.


Most people are already somewhat familiar with refinancing – there are two distinct types of refinancing: 1) A rate and term refinance which doesn’t produce any exchange of money other than the associated closing costs which typically range from 1 to 1.5 percent of the value of the loan. With a cash-out refinance loan, you are “cashing out”  the equity that has accrued into cash. This gives you cash in hand, to use for any number of different purposes. Closing costs apply to both types of refinancing.


A home equity line of credit (HELOC) is secured against your home. You might think of this as being similar to a secured credit card. However, instead of an initial lump sum to secure the line of credit, your home is used. The line of credit is tied to the equity in your home, so it could be thousands or even tens of thousands depending on the equity accrued in your home One major advantage is that a HELOC typically has lower interest rates than refinancing options because the line of credit is secured against your home. However, there is one drawback – if you default on the line of credit, the creditor could go after your home as compensation. Depending on the agreement, you may also be required to make an initial withdrawal or pay an inactivity fee for lack of use on the account.


You’ve probably heard people talk about a second mortgage. Often, this refers to a traditional home equity loan. Since you already have an initial mortgage, the second mortgage (or home equity loan) is against the remaining equity in the home. A second loan is subordinate to the first, so interest rates are often higher because the lender is assuming a greater risk -the first mortgage is given a higher priority of recovery in the event of a default. Most traditional home equity loans apply a fixed rate, although variable rates are sometimes available.


Your credit score comes into play both for refinancing and equity options. Since a HELOC tends to have the lowest interest rate, it may be your best option if you have bad credit. However, it’s a good idea to investigate all of your available choices before settling on a decision. There are pros and cons to refinancing and equity partnerships, although equity partnering allows for greater flexibility to meet your financial situation without the challenges or requirements of traditional refinancing..


Even with bad credit or no credit, home equity partnership in Chicago is the best option. Speak with the professionals at SKYDAN Equity Partners to learn more about traditional refinancing versus our equity partnership program.