Category: Home Loan

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.

Types of Housing Loans: Choose the Right One

Housing Loans

Types of Housing Loans: Choose The Right One

Are you worried about figuring out the best type of mortgage to buy your dream home?

If yes, then stick to this post until the very end, and you’ll soon realize that choosing amongst the different types of home loans isn’t that problematic. When you wisely choose between the different types of mortgages, you could easily save a lot on your down payment, fee, and interest.

You just need to know the types of loans available, and if you’ve budgeted a down payment amount, reviewed your credit, then you would have more clarity for choosing the right home loan plan for you.

Fixed-rate Loan

It is a type of the most common conventional loan, where the life of the loan is typically around 15-30 years. In this type of loan, you are supposed to pay a single interest rate every month until you completely pay the loan. A Fixed-rate loan also includes a down payment.

Eligibility Criteria

Recommended for homeowners who possess a permanent job and are comfortable paying a fixed amount of savings every month. If you plan to stay in the same house as long as you are paying the loan amount, this kind of loan would be best suited for you. Anyone who plans to move after a little while must consider other loan options.

Adjustable-rate Mortgage

Adjustable-rate mortgages (ARM) offer mortgage interest rates lower than a fixed-rate mortgage for a certain period, such as five or ten, rather than the entire life of the loan. Unlike Fixed-mortgage rates where the interest rate is adjustable, only the initial interest rate is fixed for a certain period of time. After this initial period, the interest rates reset at yearly or even monthly intervals. ARMs are also referred to as variable-rate mortgages or floating mortgages.

Eligibility Criteria

It is well suited for home buyers with lower credit scores. Because it is generally not possible to get reasonable rates on fixed-rate loans if your credit score is low, therefore an adjustable-rate mortgage can help push those interest rates down enough to put homeownership within your reach.

This type of loan will also be an excellent option for you if you wish to move and sell your home before the fixed-rate period is up. The only problem with ARM is that your monthly payments can fluctuate.

FHA LoanFHA Loan

Are you bothered about the down payment amounts involved in different mortgage types? Then FHA or Federal Housing Administration loan is for you. With the help of this loan, you can borrow as much as 96.5% of your home’s total value. Unlike other typical loans that involve at least 20% of your home’s purchase price as the down payment. With an FHA loan, you’ll need to make a down payment of just 3.5%

Eligibility Criteria

FHA is usually recommended to homebuyers with very meager savings. To qualify for this loan, buyers must have a credit score of at least 580. Even If your credit score falls between 500 and 579, you can still apply for an FHA loan, but you’ll have to make a 10% down payment.

VA Loan

VA loan could be the best alternative to a conventional loan if you have served in the United States military. Veterans that qualify for a VA loan easily bag their sweet home with zero down payment and no mortgage insurance requirements.

Eligibility Criteria

The US Department of Veterinary Affairs backs the VA loans, and therefore VA has strict requirements for people to qualify for it. If you are active in military service and have served for 90 continuous days, you will be eligible for this loan type.

If you want to know more about the criteria for a VA loan, proceed to this post.

USDA Loan

The USDA Rural Development loan is designed primarily for families residing in rural areas. It is a Government-backed loan in which the government finances the entire 100% of the home price. USDA-eligible homes need no down payment and are offered discounted mortgage interest rates to boost.

Eligibility Criteria

People living in rural areas who are facing financial issues can access USDA-eligible home loans. These home loans are particularly designed to bring homeownership within easy reach with affordable mortgage payments. To comply with the USDA loan, your debt cannot exceed more than 41% of your income. Also, you’ll have to purchase the mortgage insurance with the FHA.

Frequently Asked QuestionsPeople Also Ask

  1. How many different types of housing loans are there?

There are a total of 8 types of mortgage loans for buyers and refinancers. These include fixed-rate, FHA, VA, adjustable-rate, USDA, interest rate mortgage, and Jumbo mortgage.

  1. What are the 4 types of housing loans?

The 4 main types of personal loans are-

  • Unsecured Personal Loans
  • Secured Personal Loans
  • Fixed-Rate Loans
  • Variable-Rate Loans
  1. Which type of loan is the cheapest?

The secured loans typically offer the lowest interests as compared to unsecured loans. The reason being lenders may consider a secured loan to be lesser risky as there’s an asset that backs up your housing loan.

Conclusion

Many new home buyers get confused while choosing the right mortgage plan, as there are several options to choose from. One best tip to make this process a bit simpler would be to figure out certain things. Nailing down things like your budget and down payment and reviewing your credit score will help you have a better idea as per your requirements.

Related to housing loans: Mortgage Calculators

Refinancing a Mortgage – Your 2021 Guide

Refinancing a Mortgage - Your 2021 GuideMortgage refinancing is when you pay off your existing mortgage by obtaining a new loan. With the existing one paid off, the new loan takes its place, which you then pay in monthly installments.

But it isn’t as easy as it sounds; Did you know that the costs could be 3-5% of the loan amount, which could be $2,000-$5,000?

The COVID-19 pandemic has caused the mortgage rates to lower to the 3’s from the 4’s of 2019. If you want to refinance, now is the best time before the rates rise again in mid to late 2021.

This article walks you through everything you need to know about refinancing, its types, pros, and cons, mistakes to avoid, tax implications, etc.

What Is Refinancing a Mortgage?

Refinancing is a process by which you obtain a new loan either to pay off the current one or to consolidate the debt, on the condition that the new interest rates are lower with better terms. With refinancing, the borrowers negotiate a new loan agreement with lower monthly payments, a better monthly payment structure, and change the loan type.

Types of Refinancing

No two refinance loans can be the same. They vary in many ways depending on their debt, mortgage, and also the reasons for refinancing. Having said that, there are three types of refinancing loans.

  • Rate-and-Term Refinance
  • Cash-out Refinance
  • Cash-in Refinance

Rate-and-Term Refinance

With a rate and term, the loan amount is equal to the mortgage on the home. The homeowners can pay off the original mortgage and get a new mortgage with an altered loan term or mortgage rate, sometimes even both. You can either:

  • Lower the loan term and maintain the interest rate
  • Lower the interest rate and maintain the loan term
  • Lower the interest rate and the loan term

The aim is to reduce the monthly payments and save money. So, you choose whichever option works the best. However, if you shorten the length of your loan, the monthly payments will be higher.

Cash-out Refinance

With a cash-out refinance, you tap into the equity in your home. Home equity is the difference between the mortgage amount and the value of your home. The new loan you get is higher than the mortgage.

You get to pay off what you currently owe on your home and cash out the excess amount. In the case of a debt consolidation refinance, the cash-out will be directed to the creditors.

Depending on the current market, you may be able to get a lower interest rate or shorter term, whatever you may desire.

Cash-in Refinance

With a cash-in refinance, the homeowners can pay down or close out the existing mortgage. The lower the money you owe to the bank, the lower your interest rate. You can also have a shorter loan term too.

There are various reasons why homeowners prefer a cash-in:

  • Lower interest rates and LTV ratio
  • Cancel mortgage insurance premium payments

Pros and Cons of Refinancing Your Home

Refinancing the home allows homeowners to take a breather in times of economic uncertainty. However, you are essentially taking a new mortgage loan with better terms with a refinance than your current loan. But it need not be so since it depends on various other factors.

It pays to understand the process, evaluate the pros and cons before choosing to refinance.

Pros and Cons of RefinancingPros

  • Low monthly payment
  • Lower interest rate
  • Save your interest in the long term by reducing your loan term.
  • Convert from an adjustable-rate mortgage to a fixed-rate mortgage and enjoy the predictability and stability it offers. Locking the rate helps to protect against rising interests.
  • A cash-out refinance helps you pay off the loans and saves you a chunk of money for home improvement projects.
  • Homeowners whose principal is paid off will not be required to pay private mortgage insurance.

Cons

  • Lowering monthly mortgage payments resets the length of the loan.
  • Shifting to a fixed-rate loan prevents you from taking advantage of lowered interest payments in the future.
  • Lowered loan term will increase the monthly payment.
  • Cash-out refinance will cost you more interest throughout the life of the loan.

To Refinance or Not to Refinance

Refinancing your loan will save money, especially when the interest rates are low. You can also build home equity and pay off your mortgage. But are these worth obtaining a refinance?

Here are a few pointers to consider before making a smart financial decision:

  • Can you lower the interest rate by one-half to three-quarters? If so, you can reduce your mortgage payment substantially.
  • Your monthly savings should balance the cost of refinancing.
  • Do not refinance if you plan on moving any time within the next two years. You cannot recoup the cost within this timeframe.
  • Are your proceeds from refinancing going towards retirement savings or on a spending spree? If it’s the latter, do not refinance.
  • Are you cashing out to renovate your kitchen or bathroom? Doing both can increase the value of your home.

Best Time to Refinance Your Mortgage

Your mortgage loan officer has a monthly and a quarterly target to meet. Not everyone can keep up with their targets and will be desperate by the end. As such, you will be able to score better terms on your mortgage.

Considering the above, the best time of the month will be the last two weeks of every month. And the best time of the year for refinancing your mortgage will be the last month of every quarter, March, June, September, December.

The Refinance Application Process

Refinancing a Mortgage ApplicationThe mortgage refinance process can be pretty intimidating, but they aren’t different from applying for a home loan. Here’s a quick overview of the application process:

  • Make sure your credit score is high enough for a new loan.
  • Compare different mortgage loans to find better loan options.
  • Gather all the necessary documentation.
  • Apply for a mortgage refinance and ensure that you do not make any mistakes.
  • Your lender takes over starting with the appraisal process. You are responsible for the cost of the process, which is $300 and $400.
  • Your refinance loan goes through an underwriter who check for the mistake, missing documents, and such.
  • Lock your interest rate so that you get the rate specified in the approval letter. Make sure this happens six days before the closing process, or the closing costs can increase.
  • You can close the loan in the presence of a lawyer or notary public.
  • The three days right of cancel period comes into effect, after which the lender will pay off your old mortgage, and the new refinance loan will be in effect.

Documents Needed for Refinancing a Mortgage

Your lender might require these documents before you qualify for a refinance loan.

  • Pay stubs (for the last 2-3 months)
  • W-2 and/or 1099-MISC forms (for the past two years)
  • Tax returns
  • Statement of assets (including bank statements, retirement accounts like 401k, bonds, stocks, mutual funds, life insurance policies, etc.)
  • Statement of debts
  • Homeowners’ insurance

Mortgage Refinance Requirements

The first step in the refinancing process is to make sure you are eligible for loans and be prepared for the lengthy process. Here are the minimum requirements to apply for a mortgage refinance:

  • You may need six months or a year after you own a property with your name on the title to apply for a mortgage loan.
  • An adequate credit score of 620 or higher.
  • A 20% home equity is the minimum requirement for refinancing.
  • Your debt-to-income ratio should be 50% or lower. If you have a higher DTI reduce your loans before applying for a refinance.
  • Ensure that you can afford the closing costs. Some lenders may roll it into your new loan.

Costs of Refinancing a Mortgage

A refinance comes with costs and fees that you would have to pay beforehand. So, it pays well to consider how much the refinance would save over the years:

  • Origination fee: Up to 1.5% of the loan amount
  • Application fee:$75 to $500
  • Credit report fee:$30 to $50
  • Home appraisal:$300 to $400
  • Home inspection:$300 to $500
  • Flood certification fee:$15 to $25
  • Title search and insurance fee:$400 to $900
  • Reconveyance fee:$50 to $65
  • Recording fee:$25 to $250

Refinance Closing Costs: Lower and Avoid Fees

The goal of refinancing is to be able to have spare cash for expenses. But what if you cannot afford the fees?

Here are a few ways by which you can reduce the costs:

  • Improve your credit score and debt to income ratio.
  • Negotiate the fees if possible, especially if you have good credit and stable income.
  • If you go with the same company as your mortgage, you can save money on title fees.
  • Think twice about paying for mortgage points. With good credit, you are already eligible for a low-interest rate.
  • You can also avail of third-party services for a home inspection, title, etc., for inexpensive options.
  • Your lender may waive appraisal fees if your home has been appraised recently.

However, few companies may also offer no costs. But in truth, the lender rolls it into the mortgage loan amount spreading it over the life of the loan.

Pitfalls to Avoid When Refinancing a Mortgage

Pitfalls to AvoidMost homeowners look for low interest in mortgage refinancing. But finding and availing one is not as simple as that. Here are a few mistakes you might want to avoid when looking to refinance a mortgage.

  • Not shopping around for better interest rate: Even half a percentage reduction can save thousands in the long run.
  • Not looking into the terms: Low mortgage interest rates can hide high fees. Ensure you check the closing costs before finalizing the refinance loan.
  • Not Saving enough: To make the refinance worthwhile, you need to make sure that the new interest rate is at least a full percentage lower than the current one.
  • Refinancing frequently: In the chase for lower interest rates, homeowners end up refinancing. With every new loan, you have further fees and an increased loan balance. This cycle may take years to break even.
  • Not taking time to review the documents, including the good faith estimate: Unscrupulous mortgage lenders can add hidden fees to the final documentation. Make sure it matches with the good faith estimate.
  • Cashing out home equity: When you take too much out of your home equity, you leave yourself exposed to financial troubles when the real estate prices fall.
  • Extending the life of your new loan: In the search for a lower interest rate and low monthly payment, your repayment term can increase.
  • Agreeing to prepayment penalties: There is no need for a refinance to have a prepayment penalty for more than 3-5 years. It is a way for your lender to make up for the “no-cost” refinance.

Misguided Reasons to Refinance Your Mortgage

Even with a lower interest rate, refinancing may end up costly for a few due to their closing fees. While everyone has a reason to refinance, here are a few reasons for which you should not refinance your home:

  • Consolidating your unsecured debt like credit card debt into your secured debt; When you miss the monthly payment, you will end up losing your home.
  • Do not refinance to save up for a new home. If you plan to move within two years of mortgage refinancing, you are not saving anything at all.
  • Cashing out for investing in a stock market is not a good idea even when it seems stable. But if you are looking to build your emergency fund or renovate your home.
  • Switch from ARM(adjustable-rate mortgage) to fixed-rate loan only if you are not planning to sell anytime in the near future.
  • If you want to refinance purely to take advantage of the no-cost refinance, the fact is there is no such offer. Mortgage lenders wrap the costs into your loan.

Appraise Your Property Before Refinancing

A home appraisal is an essential step in your refinance process where an appraiser gets you an estimate of how much your home is worth at a current point in time.

They start by taking pictures of every room in the house, along with the exterior. Then by comparing your home to the prices of the other homes in the neighborhood, they finalize a price. Your lender considers this as an upper limit for your home loan.

A low appraisal is a serious problem since it lowers the value of your home, whether you are refinancing or selling. Here are some ways by which you can increase the chances of a better appraisal:

  • Improve the curb appeal by planting new plants and mowing your lawn.
  • Declutter your home and put away everything in its designated place.
  • Ensure that all the appliances and light bulbs work.
  • Touch up the paint if needed. Or repaint if possible.
  • Add small upgrades to increase the home value.

However, you may not always need an appraisal for refinancing. In case you have a VA or a USDA loan, an appraisal may not be necessary at all, and you can refinance up to 120% of your loan value.

Impact of Refinancing on Property Taxes

Refinancing doesn’t affect property taxes in any way. But if you are in a neighborhood with increasing property rates, your appraiser may value your home to be much higher than your earlier assessed value. While this doesn’t increase the taxes in itself, it is an indication that the taxes may increase in the future.

Tax Implications of Refinancing Your Mortgage

While refinancing a mortgage can be a money-saving move, it has profound implications for your tax. Refinance loans are viewed as debt restructures and would not enjoy the same tax benefits as your original mortgage.

For a loan the originated before Dec 15, 2017, the interest will be deducted for a $1 million loan balance. In the case of loans after the cut-off date, the loan balance should be $750K for joint filing and $500k for married filing separately.

Another point to note is that there will be less rate to deduct when refinancing to a lower interest rate during the tax period.

For example, if you pay 5% interest on a 30-year loan and refinance to a 15-year fixed-rate mortgage with a 3% interest, you can see a 40% reduction in interest costs.

While you save money by paying less interest, you would not be able to claim much during the tax period.

Claim Your Refinance Tax Deductions

You can claim your:

  • Mortgage Interest
  • Discount Points
  • Closing Costs

Concerning the discount points and the costs, you can claim these as deductible through the course of your loan. For example, if you have spent $5,000 and $15,000 on these expenses for a 30-year fixed-rate mortgage term, you can deduct $250 and $500 every year from your taxes.

Coming to the mortgage, you can claim the deduction for the interest paid the same year. For example, if you paid $1000 in mortgage rates for the year 2021, you should deduct $1000 from your taxes for the same year.

The Effects that Refinancing a Mortgage Have on Credit Scores

Refinancing a Home - Factors Affecting Credit ScoreMortgage refinancing can affect the credit scores, albeit temporarily, in a couple of ways:

  • Credit Check: With every refinancing, your lender will do a credit check to check your credit standing and history. This is called a hard inquiry which causes your score to drop slightly and momentarily.
  • Applying for multiple loans over a long time period: Every new mortgage loan that you apply for is likely to make a hard credit inquiry every time. And with every check, your credit score can negatively affect your score. Ensure that you place the inquiries within a 14-45 day period to minimize the hit to the credit.
  • Account Closure: Every loan that you close can also lower your credit score. But if the loan is in good standing, the hit to your credit score might be less.

Conclusion

Refinancing makes sense if you are looking to lower the interest rates and mortgage payments. But you may want to research and shop around for better options. Not every lender has the same rates, terms, and costs for closing.

Refinancing is an easy way of hitting your financial goals, but only if you are careful about the refinance process and the lender. With the rates at a record low, you may want to commit before they rise again now that the world is returning to normal. But make sure you do not have any plans to move or sell until you break even.

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.

Other timely articles you may find helpful:

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.

Is it better to get a home loan from a bank or lender?

Is it better to get a home loan from a bank or a lenderAcquiring a home loan is a complicated and time-consuming process. So, there are several factors you need to consider. Aside from making sure you get the best rate on your mortgage. You also need to consider the terms of your mortgage loan. The terms of your mortgage determine how long it will take to pay it off in full, amongst other things.

So, when applying for a mortgage, you need to pay attention from start to finish. One of the primary things to consider when applying for a home mortgage is who you obtain the loan through. Commonly, your two main options are either a bank or a lending company like Priority Lending.

There are benefits and disadvantages to both methods. It all depends on your current credit score and other factors. While independent variables impact whether a bank or lender is right for you. In general, there are some distinct differences between obtaining a mortgage via each method.

So, it’s essential to educate yourself about the pros and cons of each method. To learn more, continue reading.

Is it better to get a home loan from a bank or lender like Priority Lending?

To start, neither method is “good” nor “bad.” Determining which way is best for you to acquire a mortgage, you’ll need to assess your finances independently. When doing so, make sure you look at your current income, debt, and savings. These are some of the main variables that impact whether you get a mortgage or not.

In terms of convenience, many banks offer home loan assistance programs to their members. So, if you’re looking for an easy way to get a mortgage, consider using your bank. But, in some instances, you may be denied for approval. So, in these instances, using a lending company may be your only option.

Typically, lending companies like Priority Lending can work with you on more of an individual level. Especially compared to banks, which have strict application requirements. Banks tend to have higher interest rates for anyone besides first time home buyers.

Alternatively, lending companies can be more flexible with your financial history and income reports. So, your odds of getting approved for a mortgage is high compared to using a bank. Mortgage lenders tend to offer more variety in their mortgage options.

Most banks use the same mortgage offers for all customers. Which can lead to restrictive requirements that disqualify you before applying.

Finding the best home loan option for your needs

To see what option is best for you without affecting your credit, get pre-approved for a mortgage. Getting pre-approved lets you know what mortgage options are available without having a significant impact on your credit history. Getting pre-approved also helps you know exactly how much house you can afford.

While not required, it’s recommended that you get pre-approved.

People Also Ask

Q: Is it better to get a mortgage from a bank or lender?
A: lenders can typically provide more benefits than banks. The benefits in question relate to your interest rate, down payment, etc. Banks have stricter requirements for mortgage approval than some lenders. So, it can be challenging to find a bank willing to accept your application.

Q: Which lender is best for a home mortgage?
A: in 2020, here are the top 4 lenders to secure a home mortgage from Quicken Loans, loanDepot, SoFi, and New American Funding.

Q: What is the easiest mortgage loan to obtain?
A: FHA mortgage loans are the easiest to obtain. FHA loans have more affordable interest rates and loan terms than other types. They’re also backed by the federal government, making the application process a lot easier.

Knowing if it’s better to get a home loan from a bank or lender?

We’ve covered all of the essential facts and information you need to know about acquiring a mortgage through banks vs. lenders. Use this article to help you make the right decision about the best way to acquire a mortgage for your circumstances. Contact a Priority Lending to learn more about options available for your mortgage needs.

Contact Priority Lending

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Tucson, AZ 85704

520-531-1119

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