There was much talk a few years ago about the government stimulus package. It was a $787 billion bill termed the American Recovery and Reinvestment Act of 2009. It contained a huge array of spending projects as well as tax breaks designed to stimulate a swift revival of the US economy. The theory behind this package was Keynesian economics, which teaches that increased government spending can lessen the effects of a recession.
It may or may not have worked
Whether or not the American Recovery and Investment Act actually lessened the impact of the recession we were suffering is still up for debate. There are those who believe that it was successful while others say it was a waste because most of the money was used to pay down debts and reduce borrowing. Be that as it may it did lead to one thing that could be your own government stimulus package. It’s called the Home Affordable Refinancing Plan or HARP.
Never a better time
Thanks to HARP there has literally never been a better time to refinance your home. This is because you could use HARP to refinance it at an amazingly low rate and in doing so reduce your payments by $3000 a year or even more.
Would you be eligible?
To be eligible for HARP you would need to have a mortgage for $625,500 or less – unless your home is in a high-cost area in which case the loan limits might be higher. The whole idea behind this program is that the federal government wants banks to cut your mortgage rates to put more money in your pocket, which is good for the economy.
Of course, the banks are not very happy with HARP because it means you could shop several different lenders and not just your current mortgage holder. In addition, your home’s loan-to-value ratio (LTV) can be 80% to 125%. Banks would rather keep you at the higher interest rate you got when you financed your mortgage many years ago. In fact, this is such a good deal that it’s practically a no brainier to jump on HARP now. But you will need to act quickly if you want to refinance your house at these current low rates.
Most Americans that do a refinance through HARP save $250 a month. Could you use an extra $250 a month? We thought so. Depending on your current rate you might even be able to shorten the term of your loan. And what typically happens is that one or two payments are deferred or skipped, which would put even more money in your pocket.
Where do you find these low rates?
There are several free websites where you can compare the rates on mortgages and then choose the lowest one. This, of course, is one of the best things about the Internet. It allows you to do business with banks and other lending institutions all over the country – not just in your city or state. One of the biggest and best respected mortgage refinance comparison websites is RateMarketplace.com. It is one of the few online companies that have HARP lenders in its network.
There is no cost or obligation to use RateMarketplace.com and its service is both easy and fast. In fact, it will take you only about five minutes to calculate what your new payment would be. The service is free. You can also calculate what your payments would be if you chose to refinance with cash out, consolidate your debts, get a home equity loan or buy a house. The net/net of using RateMarketplace.com is that you have nothing to lose but maybe your high mortgage interest rate.
Speaking of debt consolidation
If you feel as if you are sinking in a quicksand of debt and have equity in your house, one good solution is to use that equity to consolidate and pay off those debts. Many people have found debt consolidation to be a good way to get their finances under control. While a debt consolidation loan can come in the form of a secured loan, an unsecured loan or even by borrowing from your retirement plan, the best idea is probably to tap into the equity in your home because you end up repaying yourself.
The two types of home equity loans are a straight home equity loan and a home equity line of credit or HELOC, which resembles a credit card in that you pay interest only on the amount of money you withdraw. Most HELOCs have a variable rate of interest and low minimum payments. If you are approved for a HELOC you will probably have 10 years to take out the equity and then another 15 to 20 years to repay it.
How much could you borrow?
How much you could borrow to pay off your debts usually depends on a combined loan-to-value ratio of 80% or 90% of the value of your home. Naturally, the interest you’re charged will depend on your credit score and how good you’ve been about making payments on your debts.
A lower rate of interest
One of the biggest advantages of a home equity loan is that the interest on it will be less than the average interest of your current debts. These loans are relatively easy to get if you have equity built up in your house. In addition, the interest you pay on a home equity loan or HELOC is deductible just as it is with a conventional mortgage — if you itemize your taxes. In fact, a home equity loan is the only type of interest you can deduct under any circumstances except for qualified student-loan interest.
The biggest possible problem with a home equity loan is pretty obvious. If you don’t repay the loan, there can be horrible consequences. If you can’t make your loan payments, you might lose your house. Your credit score will suffer dramatically and it may be some time before you can get any other type of financing.
Do a careful analysis
You can avoid this by doing a careful analysis of your cash flow to make sure you will be able to make that new payment every month. It’s also good to make more than the minimum payment required although this may not be important if you are using the money to consolidate high-interest debts that are causing you serious financial problems.
A hypothetical example
Here is a hypothetical example of how you could use a home equity loan or home equity line of credit to consolidate your debts. For the purpose of this example let’s assume you have the following debts:
- $10,000 in high-interest credit card debt with a monthly payment of $172
- A $4500 car loan with an 8% interest in a monthly payment of $330
- $3300 in student ßdebt where you defaulted on the loan but that prior to this your monthly payment was $150.
Again for the sake of the example we will say that you have a 30-year mortgage on your house and $50,000 in equity. However, you still owe $100,000. This means that you have debts totaling less than $40,000 and could consolidate them with a home equity loan or HELOC, as you would be well under the 80% loan-to-value ratio. You would trade three monthly payments for a single, lower payment and the interest would be deductible. In addition, if you pay off those three loans, it will improve your credit – especially because that student loan you defaulted on will now be off your credit reports.
A home equity loan or line of credit can be a useful tool if you are a responsible homeowner and need to consolidate your debts. One of these loans will provide easy access to capital at lower rates of interest, reduced payments and even a tax deduction. Unfortunately, homeowners who abuse these loans and don’t make their payments can literally find themselves out on the street.