Equity loans: Variations in refinancing

Refinancing is an option many people opt for, in these times of financial difficulty. Refinancing allows the borrower to take a new loan with terms that suit his present financial abilities. In the current scenario where people are losing their jobs due to lay offs and job cuts, still other are having to do with pay cuts, it is inevitable the many are trying to refinance their existing mortgages to continue holding on to their precious homes.

The simplest refinancing is when a new loan is taken and the old loan id paid off. The new mortgage is selected in such a way that the interest rates are low and the monthly repayment installment is lower than the first loan and can be afforded by the borrower. Thus the new terms would protect the borrower’s credit score and save him from defaults. Refinancing can accommodate many variations which the borrower and lender can work out for their benefits.

‘Seller takes back ‘mortgage - In this the seller gives a part or sometimes the whole of the equity on home as first or second mortgage. This enables him to sell his house with all the equity in the house.

Wrap around mortgage – the seller keeps his original first mortgage. The buyer of the property gives money to the borrower who gives it to the lender as repayments. Thus these three people work in tandem for this type of variation to be successful.

Land contract – Here too the seller is able to retain his original first mortgage. Once the loan is paid, then the title of the property is transferred.

Buy down subsidy – A developer interested in the property can provide a subsidy as interest. This helps in lowering the monthly repayment installments especially in the initial years of the mortgage. This actually allows the developer to sell units of the property.

Balloon mortgage – This type has a fixed rate of interest and is usually taken for a short period of time.

Graduated payment mortgage – Here the initial payments that are required are of small amounts. This amount sees a gradual increase in a period of 5 to 10 years.

Reverse annuity mortgage / Equity conversion – The property is used as collateral by the lender and he gives a monthly payment to the borrower against the property. This type of mortgage is usually resorted to in times of financial difficulties and needs of the borrower.

Rent with option to purchase – In this type the renter agrees to purchase the property and the time and price is fixed beforehand. An option fee is paid to the owner which may or may not be included in the rent amount.

Many more options and variations can be discovered since many have been customized to suit the needs of individual borrowers. The lender and borrower work in unison for the approval of such associations between them. At times a third party is also involved.