Category: Home Equity

Second Mortgages

Second Mortgages2020 was a financially sound year for homeowners since the home equity has an average gain of $26,300 last year. According to Corelogic, an average homeowner has more than $200,000 in equity.

The pandemic brings in unprecedented financial difficulties, during which time you may need access to a large amount of money. Consider tapping into the equity and take out a second mortgage.

This article walks you through the inside workings of second mortgages, closing costs, interest rates, pros and cons, qualifications, requirements, the application process, and much more.

How Does a Second Mortgage Work?

The second mortgage is a loan similar to the one used to purchase your home. The reason it’s called a 2nd mortgage is that it is next in line to be repaid after your purchase loan.

Since it uses your home as collateral, the second mortgage lender can repossess your home if you fail to repay. In that case, the loan used to purchase your home is the first one to be repaid. The remaining, if any, will go towards the second mortgage.

Second mortgages tap into your home’s equity, which is the current market value of your home minus the loan balance. In most cases, lenders would let you borrow 85% of the home equity, depending on your credit score.

And, since the second mortgage loan is taken against your home, it has a lesser interest rate than other loans such as personal loans or credit cards. Depending on your choice of loan, it can either be a fixed rate or variable rate.

Types of Second Mortgages

The common types of second mortgages are:

  • Home Loans: The lender gives you a lump sum where you get the entirety of the loan amount to use as you wish. The loan is then repaid in fixed monthly payments. Generally, they come with a fixed interest rate and a fixed term.
  • Equity Lines of Credit: The lender gives you a line of credit from where you draw a certain amount of money as and when you wish, just like a credit card. Line of credit usually comes with adjustable rates.

Since they are secured against your home, they are cheaper than most loans but not as much as the first mortgage.

Is a 2nd Mortgage a Good Idea?

Second mortgages can be a great source of money when you require a lump sum at a reasonable rate of interest. They are a good idea when used for things that have long-term value.

Most people take out a second mortgage for things that have a long-term value, such as:

  • Home Improvements – You can proceed with home improvements such as a kitchen remodel or bathroom renovation, etc.
  • Debt Consolidation – The loan gives you the chance to pay off high-interest loans such as student loans, credit cards, etc.

However, it is not advisable to use it for inconsequential things that do not add value.

Closing Costs on Second Mortgages

As with the primary mortgage, the second mortgage also has closing costs, though reasonably reduced. Even then, it amounts to 5-6% of the loan amount.

For loans up to $200,000, the lenders charge a “flag” title insurance policy with a flat fee of $125 and a sub-escrow fee which is $225 -$250.

Additionally, the standard fees such as the recording fees, notary fees, and the payoff fees amount to $60-$150. And then, there are the administrative fees charged by the lenders that come to $250.

Apart from that, you may have to pay an additional cost of $300 – $400 if an appraisal is required. Finally, the credit fees come to $15 – $30.

How Much Home Equity Do You Need for a Second Mortgage?

Though equity requirements vary, second mortgage lenders prefer that you have a 15% – 20% equity in your home.

You can borrow up to 85% of the home’s equity, which is 85% of your home’s value – any loan balances. For example, consider your home’s worth to be $300,000 and loan balance $200,000.

85% of $300,000 = $240,000.

2nd mortgage would be $240,000 – $200,000 = $40,000.

Does a Second Mortgage Have Any Tax Benefits?

The tax benefits primarily depend on the kind of debt.

When your second mortgage is used to buy, build or improve a primary/second home, it becomes a home acquisition loan. If the home acquisition debt and the home equity debt combined together come up to $1.1 million, you could deduct all your interest in that particular year.

However, if the home acquisition loan is $2,000,000, you’ll be able to deduct only half of the total interest paid that year.

Can You Get a Second Mortgage to Buy Another House?

Yes! You can use a second mortgage to buy another house. Tapping into the home equity allows you to enjoy better rates of interest and tap into the financial resources that lay untouched otherwise.

If your second home is an investment property, home equity is often the least expensive option since they have lower interest rates.

Are Second Mortgage Rates Higher than First Mortgage Rates?

Second mortgages have higher interest rates than the first mortgage. This poses a risk to the lenders since they are second-in-line to be paid in case of foreclosure.

However, a second mortgage has lower interest rates than other unsecured loans such as personal loans and credit cards.

How Much Does It Cost to Get a Second Mortgage?

Second mortgages cost 2%-5% of the mortgage amount both in upfront costs and those that are paid over a period of time. Most of these are similar to that of the primary mortgage but are paid separately since they are considered to be separate loans.

Pros and Cons of Second Mortgages

Second mortgages, as with every other loan, come with their own pros and cons. Talk with your lender and consider the risks to make sure the second mortgage loan is the right one for you.

Pros of a Second Mortgage

Lump-Sum: Second mortgages allow you to borrow a significant amount of money. Since the loan is secured by your home, you would be able to borrow much more than unsecured loans.

Lower Interest Rate: Second mortgages have lower interest rates than other loans since they use real estate as collateral which reduces the risk to the lender.

Tax Benefits: In certain cases, the interest accrued will be eligible for tax benefits. According to the Tax Cuts and Jobs Act, you’ll be able to claim deductions if used for home improvements.

No Limits: Second mortgages give you the freedom to use the mortgage amount as you wish. You can use it for big purchases you wouldn’t be able to afford otherwise.

Cons of a Second Mortgage

Risk of Foreclosure: Since the loan uses your home as collateral, you run the risk of foreclosure if you fail to pay it back.

Closing Costs: Second mortgages can be expensive, much like your primary mortgage. The closing costs can end up in thousands of dollars in origination fees, appraisals, credit checks, and more.

Interest Rate: Though the rate of interest is much lesser than your credit card, it is higher than your purchase loan.

Undue Pressure on Your Budget: A second mortgage adds to your debt burden even with your low-interest rate. It can place pressure on your budget, especially if you are living paycheck to paycheck.

Requirements for Second Mortgage

To qualify for a second mortgage in the form of a home equity loan or HELOC, you’ll need:

  • A credit score of 620
  • A debt-to-income ratio of 43%
  • A decent amount of equity

Below is the paperwork your lender will require before closing the loan:

  • Copy of the deed to the property
  • Tax appraisal
  • W-2 (last 2 years)
  • Tax returns (last 2 years)
  • Paystub (current)
  • Proof of income (child alimony, disability payments, child support, lawsuit settlement, inheritance, and other sources of income)
  • Copies of bank statements (3-6 months)
  • Open credit accounts
  • Current loan statement
  • Homeowners insurance

Apply for a Second Mortgage

In terms of getting a second mortgage, the application process is similar to a primary mortgage; you do not need any home appraisal or inspection. However, you may need an assessment to determine the current value of your home.

To start with, talk with your lender to check if you are eligible for other financing options, including refinancing.

Here’s the application process for the second mortgage.

  • Calculate the equity in your home and how much you can borrow.
  • Gather all the required documentation, preferably in digital format, to speed up the timeline.
  • Shop around different lenders for better rates. Compare the lenders and financing options for your situation.
  • Once you finalize the lender, make sure you fill out the application with the correct details, or it may delay the approval.
  • Fax or email the documentation to save time and expedite the process.
  • Letting the lender know the reason for the loan may help with the approval process.
  • Your lender may want to conduct an appraisal and inspection if it hasn’t been done in the last six months.
  • Review the disclosure documents and verify the payment terms.
  • Ensure that the terms of the loan match with what you have agreed to.

Piggyback Loans

Second Mortgages - Piggyback LoansPiggyback loans — also known as 80-10-10 loans — are an entirely different kind of second mortgage. Rather than borrowing against your home equity, you get a loan piggybacking the primary mortgage. In short, you’d be using two mortgages to purchase your home. The first mortgage typically covers 80% of the home price, and the second mortgage covers 10%. The remaining 10% is covered by your down payment.

It is generally used to cover parts of the down payment and avoid private mortgage insurance (PMI), as well as avoid taking a jumbo loan where the interest rates are significantly higher.

First Mortgage vs. Second Mortgage

Similar to a first mortgage, a second mortgage is also taken with your home as collateral.

The first mortgage is the primary loan that you take to purchase your home. The interest rates are significantly lower than many other loans. Additionally, they are also tax-deductible. However, the closing costs may be high and needs to be paid upfront.

The drawback is that you do not possess the ownership of the property until you pay back the loan. And defaulting on the monthly payment can lead to foreclosure, with the primary mortgage being paid first.

On the other hand, the second mortgage is taken on the home equity in addition to the primary mortgage. The rate of interest is high when compared to first but lower than the unsecured loans.

Second Mortgage vs. Home Equity Loan

Home equity loans are pretty similar to second mortgages that many confuse between the two. They are alike in every aspect, including that they use home equity to finance the loans. You’ll need to retain 20% home equity to qualify for both these loans.

The rate of interest is fixed so are the payment terms. You make a monthly payment, failing which you will face foreclosure. A home equity loan is available in a lump sum similar to the second mortgage.

Second Mortgage vs. Home Equity Line of Credit

Second Mortgages Versus Home Equity Lines of Credit (HELOC)A home equity line of credit (HELOC) is also quite similar to a second mortgage in that it is financed by home equity. It has a revolving credit line from where you can borrow money and then make monthly payments, just like your credit card.

A HELOC also has a draw period, say ten years, where you can borrow money. After the draw period comes the repayment period, during which time you have to pay it off. Once you have paid it back, you can use the money on your credit line repeatedly without applying for more home equity lines of credit.

Like the second mortgage and the home equity loan, your home is at risk of foreclosure if you miss monthly payments.

Conclusion

By taking out a second mortgage, you tap into the home equity to finance your home improvements, big purchases, and such. While it has its risks, the lower interest is an attraction.

You can use a second mortgage to make substantial improvements to your home, settle debts on loans that carry a higher interest rate. Like the purchase loan, it is taken against the real estate, which means that the first mortgages have priority when the borrower defaults.

You need not take out a second mortgage from the same lender as your primary loan. Shop around and find the lender who carries the best rates. Also, look around for other loans appropriate for your financial situation.

Priority Lending, LLC has been providing mortgage loans and helping people like you fulfill their dreams since 1997. Contact one of our loan officers today to get started on refinancing your mortgage.

Home Equity Line of Credit vs Loan

Home Equity Line of Credit (HELOC)Ever heard of the term “House Rich but Cash Poor.” It happens when you have money tied in equity but not in your hands.

1.42 million homeowners with outstanding mortgages have home equity built up on their homes. Accessing your equity can be helpful in times of emergency or even when you are strapped for cash.

Coming to borrowing, you can do it via a loan or a line of credit. Both of them use equity, which is the value of the home left over after accounting for the first mortgage.

This article discusses the difference between the two, benefits, drawbacks, interest rates, and everything in between.

What Is the Difference Between a Home Equity Loan and a Home Equity Line of Credit?

Often termed as second mortgages, the similarity lies in both using your home as collateral. Both the loans are quite different in the way they operate.

A home equity loan is a fixed loan that you borrow against the equity. You repay the loan in monthly payments over a previously agreed term, and the interest rate is for the entire loan.

The home equity line of credit works pretty much like a credit card. You can borrow as much as you need within limits and whenever you want. Again, repayment is monthly but only for the amount borrowed. The interest rate is variable and only for the borrowed amount.

Is a Home Equity Loan the Same as a HELOC?

No! Home equity loan is not the same as a HELOC. Even though they are borrowed against your home equity, they have distinct differences.

Equity loans have fixed monthly payments and a fixed interest rate over the life of the loan, while the latter has variable payment and variable interest rate.

Which Is Better: a Home Equity Loan vs Line of Credit?

Both HELOC and home equity loans can be good options, but every loan has its own pros and cons. It is essential that you talk to your lender about the terms beforehand.

The loan is a better choice if you:

  • Need a lump sum
  • Prefer a fixed rate of interest
  • Favor fixed monthly payments.

You can go for a HELOC if you:

  • Have the option to borrow as little or as much as your want
  • Upcoming expenses like college but want to have control over when to borrow
  • Do not mind the varying payments or the rate of interest.

Apart from the above, make sure you shop for better interest rates with different firms before accepting one.

Can I Have a HELOC and a Home Equity Loan?

Theoretically Yes! You can have a HELOC and a home equity loan. There are no caps on the number of loans you may hold at one point in time.

But your lender may not be so agreeable with each new application. Even if they agree, the rate of interest would be much higher the second time around, especially if it is from the same lender.

How Do You Know How Much Equity You Have in Your Home?

Home equity is the difference between the current value of your home and the loan balance. If you have more than one loan against it, the loan balance would be the sum of all debts registered against your home.

You may also want to keep an eye on the equity as it rises and falls with your home’s value. You may be able to increase it by keeping it well maintained and making calculated renovations.

What Is the Primary Benefit of a Home Equity Loan?

A home equity loan allows you to borrow a lump sum for large expenses like home improvements or consolidate your debt for a lesser interest rate.

If you use the amount for renovations, the interest may even be available for a tax deduction.

Because you borrow against your home, it might be easier to obtain than the other conventional loans.

Are Home Equity Loans Worth It?

Equity loans are worth if the amount serves a purpose like paying off high-interest loans or credit cards.

In most cases, the fixed interest rates for your home loan is lesser than a personal loan or even your credit cards.

It can also be your way out of an emergency expense or a major repair.

What Are the Disadvantages of a HELOC?

As with every loan, the home equity line of credit also has a few disadvantages:

  • Equities change with the value of the property. If the value goes down, the equity does too.
  • HELOC has your home as collateral. If you fail to make the payments, the bank can close in and foreclose the property.
  • You still have to make payments. So, if you max out your line, the credit score can take a hit.
  • Some lenders charge penalties, annual fees, closing costs, etc.
  • The first ten years are interest-only payments. After ten years, you have to pay the principal as well. Most do not expect the balloon payment and find themselves saddled with principal and interest payments.
  • Since they have variable interest rates, they can fluctuate quite a bit.

Is it a Good Idea to Get a Line of Credit?

A line of credit is a good idea when you have a significant expense coming up, but you are unaware of the costs.

Make sure you would be able to make the payments in the future or run the risk of losing your home.

Factors Affecting Your Credit ScoreWhat Is the Current Interest Rate on a HELOC?

The current interest rate for a HELOC is 5.61%. Since it is more volatile, it keeps changing.

Having said that, the rate for a HELOC is dependent on your:

A low LTV and high score may ensure a lower interest rate, but a high DTI gets a higher rate.

How Does a HELOC Work?

In a HELOC, you borrow against the equity in your home, and your home is the collateral. You can borrow as little as you like or as much as you like. You can borrow up to 85% of the existing equity.

After you repay, the credit line is replenished, and it is available back for you to borrow again.

Usually, the first ten years is the draw period, and you can withdraw up to the limit. Then starts the repayment period, which is generally 20 years.

Can You Sell Your House if You Have a Home Equity Line of Credit?

Yes! You can sell as long as you repay the line of credit in full. Since you are using your home as security, a sale isn’t possible until you repay your loan amount.

However, if the value of the home falls or if it is underwater, you may end up owing more than what your home is worth.

Do You Need an Appraisal for a HELOC?

Most lenders conduct an appraisal of their own for a HELOC. That’s a good thing because the current automation often pulls up the wrong value. But, an independent appraisal gets you a fair market value.

Meanwhile, few might also do a drive-by appraisal along with pictures to determine a value.

Is a HELOC Tax-Deductible?

Yes! Your interest on a HELOC may be tax deductible up to $750,000 as long as you use it to:

  • Renovate your home
  • New roof
  • Remodeling kitchen or bathroom
  • New driveway

The money must be used on the property, which is the source of the line.

What is the Minimum Payment on Home Equity Lines of Credit?

The minimum payment depends on the lender. Few have payments as low as $125 per month and others as much as $200.

The initial payments are towards the interest alone in the draw period. You pay back the principle only during the repayment period.

Can You Get a HELOC with Bad Credit?

Mostly Yes! But it depends on the lender. Since your home is the collateral, most lenders may offer to approve the line of credit even if it is low. But the DTI also plays an important role.

A high credit score helps with a high DTI, but if your DTI is lower, a low score doesn’t matter.

Does it Make Sense to Get Home Equity Loans?

It makes sense to take home equity loans as long as you use the money brings you some value in return, like a substantial home improvement. It also makes sense to spend it on educational expenses.

But make sure you’d be able to make the monthly payment on time, or you could lose your home.

How Do Home Equity Lines of Credit Differ from Personal Lines of Credit?

Personal lines of credit are similar to a credit card where you are given a credit limit within which you can borrow as much as you’d like. The payment depends on the amount you borrow, and the interest rate is much lower than a conventional credit card.

Equity lines of credit are on the same page as the personal line, but they are borrowed against your home’s equity. You can avail of a HELOC only if you have equity in your home. They have variable interest rates, which are much lower than that of the former.

Pros and Cons to HELOC versus Personal Loan and Home Equity Loan versus Student LoanWhat Is Better: HELOC or Personal Loan?

With a personal loan, you get a lump sum much like the home equity loans with a fixed rate of interest.

On the other hand, HELOCs are much like credit cards where you borrow against your home’s equity.

Even though the rates for home equity lines are lower than personal loans, they are variable and might fluctuate. And for that reason, lines are suitable when you intend on repaying in the near future. But if you are looking for some quick cash, personal loans are the best option.

Should I Take a Home Equity Loan or a Student Loan?

Home equity loan interest rates are lower than the student loan. The reason being the home loans have your home as the collateral.

Hence, it is better to take a home equity loan with its low rates.

Which Is Better: Cash-Out Refinance vs Home Equity Loan vs Line of Credit?

The cash-out refinance a brand new mortgage loan essentially, and hence the closing costs are higher than the home equity loans and the line of credit. But it has lower rates than home loans.

Conclusion

A home equity line lets you borrow in small amounts within the credit limit rather than all the cash during the draw period. In the repayment period, the money is paid back, interest and principal.

On the other hand, a home equity loan lets you borrow a large sum of money against the equity. You repay the same in monthly payments as you agreed with the lender.

Both have their own pros and cons. The home loans have a fixed rate, while the lines have a variable rate. The interests for both cases are tax-deductible but only if used for home improvement.

But if asked which one is better? The answer depends on your need.

Opportunity is Spelled E-Q-U-I-T-Y

 

While cruising through Instagram recently, I came across a post that indicated 37% of homeowners in the United States THINK they have more than 20% equity while, in reality, 74% ACTUALLY have more than 20% equity.  Since this was social media, of course, I accepted this fully at face value.  The creators of such services have nothing but altruistic intentions, right?

However, I knew that if I didn’t dig a little deeper into the claims of this cute little post by a very nice real estate agent, I wouldn’t have anything more to write about in this week’s newsletter – and I certainly didn’t want to let anyone down.  I quickly found the source of the statistics being quoted – Fannie Mae and CoreLogic– and dug up some other tidbits that you might find interesting.  (Let’s be honest: if you’re still reading this, I’ve either captured your interest or you’re sitting at your 7-year-old’s soccer game with nothing to do because the game has been temporarily halted so the goalkeeper can fix the ribbon in her hair.)

In an update to CoreLogic’s report, that 74% has climbed to 79.1%. Please don’t make me do the math on how many people that 5.1% increase represents, but I’m pretty sure it’s somewhere between a “boatload” and “gazillion”.  Either way, that’s a lot of people you as real estate agents can help sell their current homes and look for new ones.  Let’s do a little trivia here, just to keep things light.

While Arkansas has the lowest percentage (67.3%) of homeowners with more than 20% equity, which state has the highest percentage (91.9%) with more than 20% equity?

A. Tennessee

B. Iowa

C. Texas

D. Utah

If you guessed Utah, your love for the Mormons is duly noted, but you’d be wrong.  The folks in Texas are the winners in this one.  On their boot-covered heels are Oregon at 89.2% and Washington at 88.0%.

These stats and numbers are fine and dandy, but what’s the point in trotting them out there for all to see?  (Warning: shameless commercial is imminent.)  We have a system in place to help our real estate agents know when their clients’ homes have reached and exceeded that 20% equity threshold.  If you’ve been in the business for a few years, that database of clients is pretty hefty.  Rather than your having to go through that list client by client and figuring out whose equity is where, we can do the work for you and let you know when each client has reached that magic number.  Isn’t that what a mortgage partner SHOULD be doing for you (you know, when we’re not cruising around on Instagram looking for cat photos and trying to decide if the dress is blue or gold)?  Work smarter by letting us work harder for you.

Equity Rocks!

mans hand giving the devil horn sign

In the ‘80s and ’90s (I realize that was about a million years ago to many of you), there was a musician who had his share of the limelight and went by the name of Adam Ant (I’m about 175% sure he wasn’t born with that name). At any rate, Mr. Ant wrote his own music and lyrics, and he was well known for having lyrics that made no sense – in fact, in many instances, he went out of his way to MAKE SURE they didn’t make any sense. His 1985 hit “Vive Le Rock” is one such example with these opening lyrics: “Bang bang, you’re dead / Did not, did too / Stop diddy-bopping buddy / Bouncing Betty on you.” Many people think the mortgage industry pulled an Adam Ant when it introduced Reverse Mortgages back in 1989 – the words were all in English, but the way they were arranged on the page just didn’t make any sense.

The easiest way to appreciate a Reverse Mortgage is to STOP thinking about a mortgage as a means to an end: owning your home outright with no further monthly payments. Instead, you need to think of your home as a vehicle that keeps you moving along UNTIL THE END (quite literally). And remember, a Reverse Mortgage not only applies to refinancing – it enables people to BUY a home.

Rather than boring you with the ins and outs of a Reverse Mortgage, let me give you a practical exercise to run though in your head. For most people in their golden years, medical care is their biggest expense. You’re retired, your house is paid off, and your source of income is your investment account. If managed properly, the funds in that account will take care of your needs and wants until you pass away. However, if you have medical needs with accompanying expenses that weren’t factored in when you set up your investment strategy, that account is going to be depleted a lot faster – and while your house is paid off, and you have no monthly mortgage payment, your house isn’t really “doing” anything for you. Conversely, with a Reverse Mortgage, you can get paid TO LIVE in your home, and the money you make from your Reverse Mortgage can be added regularly to your investment strategy and/or cover those unexpected medical expenses – either way, your investment account stays a lot healthier, right? Also, with a Reverse Mortgage in place, you stay in your home as long as you wish.

At this point, you’re probably asking, “That’s fine and dandy for people who are over 62 years of age, but what about someone young who’s looking to buy her first house?” I’m glad you asked, and the answer is SIMPLE: the younger you start, the more likely you’ll have a home in your golden years that will have a boatload of equity that will enhance your retirement and investment strategies. Let me show you.

Making only $25K/year, a young person could qualify for a duplex that costs $200K by renting out the one side for just $650/month and living in the other half (for at least a year). This could be done through an FHA loan, so the down payment would only need to be $7K (3.5% of the purchase price), and that $7K could be a gift. A person working an hourly job at $12.50/hour, 40 hours/week (with two weeks off for vacation – if their employer didn’t give them paid vacation) earns $25K/yr. The average starting salary for a college graduate is about double that at $50K. My point: starting now IS POSSIBLE (and HIGHLY recommended), and the sooner you start, the faster you can “trade up” to your dream house and eventually that last house that’s going to take care of you.

Let me close this with a set of lyrics that make a little more sense – they’re from Billy Joel: “Hot funk, cool punk, even if it’s old junk / It’s still rock and roll to me.” Translation: age and style don’t matter – it’s all about the equity!