Drawing off Your Home Equity Through a Mortgage Refinance

A Home Buying Article Contributed by Elizabeth Fox-Wise

A Refinance Mortgage is One Way to Access Equity in Your Home

Millions of Americans are choosing to refinance their mortgage as a way of drawing equity out of their home. When you take a mortgage and make payments on it, you are paying a small part each month onto the principal mortgage loan amount. Over the years that small part builds into a larger portion and as you pay your debt down, the equity in your home increases.

When major expenses occur in life, such as medical problems, the need for a new car, or college tuition for your children, your equity in your home may be your best source of funding. While one option is to take out a second mortgage, or a home equity loan, another, often more attractive alternative is to refinance your mortgage.

The Difference between an Equity Loan and a Mortgage Refinance Loan

When you take out an equity loan on your home, you are taking a second loan in addition to your initial mortgage. The home equity loan is taken against the equity that you have built into your home through paying your mortgage down. As your mortgage debt goes down, your equity goes up. An equity loan allows you to borrow against the equity.

Unlike an equity loan, when you choose to refinance your mortgage you are taking a completely new mortgage and using that money to pay off your first mortgage. Typically, when a home owner is considering a mortgage refinance with the intention of drawing cash off of the loan, it is because they have paid the first mortgage down below the value of the home. Say for example that your initial mortgage amount was $150,000 and you have paid the mortgage down to $80,000.

When you get the home appraised you find that it has a current market value of $185,000. In this example the home owner may choose to take a refinance mortgage in the amount of $110,000. This give him $80,000 to pay off the first mortgage and leaves a remainder of $30,000 to be used for other purposes. The refinance mortgage is now carried instead of the initial mortgage, not in addition to it, like an equity loan.

Drawbacks to a Mortgage Refinance

The biggest disadvantage to a mortgage refinance is that if you do it too many times on a piece of property, unless you shorten the length of the mortgage each time that you refinance, you will never get the mortgage paid off.

For this reason, some people will choose to go for a shorter term mortgage each time that they refinance their home. They may take a thirty year mortgage the first time, a twenty year mortgage when they refinance and then if they decide to refinance the mortgage again, go for only a ten year mortgage. By doing it this way, the mortgage can still get paid off within the intended time frame or sometimes even quicker than originally planned.