Q&A: Should I take out a home equity loan or refinance?

Ilyce Glink is a nationally syndicated columnist, television reporter, radio talk show host and bestselling book author. Her syndicated column, Real Estate Matters, features personal finance and real estate advice.

 Seven years ago, I took out a $300,000, 20-year, fixed-rate mortgage  at 5.75 percent. I currently owe $230,000 on the loan. I want to know if I should change the remaining loan to shorten it into a 10-year fixed-rate home equity loan at 4.5 percent. Or I should do a straight refinance at 4.5 percent. Which loan will be better for me?

 Whenever you're going to refinance, you need to consider several important questions: How much will you pay to either convert the loan or do a refinance? How time-consuming or easy will it be to change the terms of your loan? Are you getting the best deal possible?

In your case, a 10-year loan should carry a much lower interest rate than 4.5 percent. In fact, as I wrote this at the end of August, I just locked in on a 15-year loan at 3.75 percent with low closing costs. I'm going to save money from the get-go, about $59 per month, so it's worth refinancing, even though my current 15-year loan (which I got in November 2009) is at 4.25 percent.

The key point is to think carefully about how much you'll pay either to convert your loan or to do the refinance. If you'll have to pay $2,500 to refinance your loan but you can convert it for $500, and the interest rates are about the same for the two loans, you should go with the least expensive choice.

Of course, when it comes to your mortgage, the smartest move you can make is to pay the least amount possible for the loan, and then to pay it off as quickly as possible.

One last thought: Some people forget to consider that they need to compare the savings from the new loan over the old loan over the same period of time. If you have 13 years left on your loan and take out a 10-year loan and still save money on a monthly basis, you're doing great. But if you take out a 30-year loan and save money on a monthly basis, you're actually worse off because you've just set yourself up for 17 more years of payments.

To see where things are for you, ask your mortgage lender or broker to give you a comparison of what your monthly payment would be on a new loan to pay it off on the same timetable as your current loan. That way, you get an apples-to-apples comparison.

In your case, you should see what your monthly payment would be on a new loan if you had to pay it off in 13 years. If your new payment is lower than your old payment and your closing costs are low or can be recouped by the monthly savings on the loan over six to nine months, you should refinance.

But if it will take you nine years to recover your closing costs on the refinance, or you're extending the term of your loan for many more years to come, you might not want to refinance.

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