Home Equity Loans – second mortgage

Kate Ross asked:




There are many issues involved in this decision. These issues include the amount of money you can save on interests, the possibility to loose those savings due to changes in market conditions, the possibility to end up paying even more than what you projected, the possibility of being unable to repay the monthly installments and having to refinance your loan.

Home Equity Loans

Home equity loans are secured loans that guarantee the lender repayment of the loan with the remaining equity on your home. Equity is the difference between your home value and the outstanding debt guaranteed by the property (usually a home mortgage). The secured nature of these loans provides the borrower with many benefits.

For starters, with home equity loans you can obtain higher loan amounts than with unsecured loans. Moreover, you can obtain longer repayment programs and thus, lower monthly payments than with unsecured loans. But most importantly, these loans have lower costs because the interest rate charged is significantly lower than the rate charged for unsecured loans. All of this is due to the lower risk that the use of collateral implies for the lender.

Interest Rate

As Explained above, due to the lower risk, home equity loans feature lower rates than almost any other kind of financial product. These loans offer rates lower than credit cards, store cards, unsecured personal loans, pay day loans, cash advance loans, overdrawn agreements, etc. Probably the only loans that feature lower rates are home loans and some subsidized student and business loans.

Not only the interest rate is lower than almost every other financial product, it also comes in two shapes. You can obtain a home equity loan with a fixed interest rate or with a variable (adjustable) interest rate. There are some differences between these two kinds of interest rates than can be very important when it comes to deciding which loan best suits your needs.

Variable or Fixed

A fixed interest rate stays unaltered through the whole life of the loan which in turn implies fixed monthly payments over the whole life of the loan too. This provides a lot of certainty to the borrower that can budget the loan payments with confidence knowing that they will stay the same each month. But, it doesn’t provide such certainty to the lender who can suffer from inflation and loose money to a fixed rate. That’s why fixed rates are always higher than variable rates at any given time.

Variable rates on the other hand, will change every three or six months according to the market conditions. Almost always these changes are moderate and don’t alter monthly payments too much. However, if an increasing tendency subsists on the market, a variable rate can turn a home equity loan into a very onerous deal.

Bernice

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Grateful Believer asked:


Ok I’ll try to make this as short as possible (if it’s even possible)…

We have a first and a second mortgage on our home. I had developed somewhat of a friendship (via phone) with our broker over the years. He had done a 2 or 3 loans for me prior to the one’s I currently have. When we went into doing a good size remodel he did a 30 year fixed mortgage loan that was killing me financially during construction. So, during the end of construction May 05′ we refinanced into a Negative AM Loan and due to needing more $ to finish our project we took out a second in the amount of $25,000 ($20,0000 was what our contractor told us we needed for completion). The plan was that a Negative AM would give us a little extra cash if we needed it for the finishing touches. With this loan I could choose month to month to either make a Neg AM minimum payment, interest only payment, 30 year fixed or 15 year fixed payment. After a year we would refinance the 1st and 2nd into 1.

Well, I had called our broker 3-4 times in the months following the signing of papers concerning when the payment for the 2nd was due and for how much. 1st contact was about 1 month after completion of the loan to let him know I hadn’t recieved a statement for the 2nd. He said it was on his desk and he hadn’t gotten to it but will soon. I called at least 3 more times over the next few months and was told the same thing during the 2nd and 3rd contact. Then by the 4th contact he said don’t worry about it just appreciate it now. I thought ok I guess we’ll just deal with it later (yes, I know that sounds stupid and why would someone do that right?) I didn’t really think much of it because like I said we had developed somewhat of a friendship over the years. (And NO not sexual, I have never met the man in person and I am MARRIED)

A year came and went, then a year and a half came. I called him sometime in January or February 07′ to asked him when we were going to refinance the loans. He said let’s do it. I started the process of submitting all the paperwork and he ordered an appraisal which we paid for out of our pocket. The result was that we had plenty of equity to qualify but due to our credit scores at the time (which weren’t to bad but not great) he advised us to wait because the interest rates were continuing to drop and he was confident that we could get a better interest rate if we were to wait a little longer. We both agreed.

Another year went by. In January 08′ I called him again to start the process of refinancing. Again, I submitted the paperwork and paid for another apprasial. I shared my concern with him regarding the news of foreclosures and it making it harder for me to get refinanced. I let him know I didn’t want to lose my home. He understood my concern but was still confident and advised me not to worry. He wanted us to somehow cut our credit card debt down by 50%. He suggested to borrow money from our family or friends. Well, needless to say that was not possible. I don’t have any rich family members or friends that would let me borrow 6 or $7,000. This was so I could manipulate the balance of my close to being maxed out credit cards. So, that’s how we left it. I was to try and get my credit cards down. That was in March. I called him and July to let him know I wanted to get it done. He asked me to call him back next week. I agreed but didn’t. Not on purpose, but at my job, the summer is crazy.

Coincidentally, while our economy is going down the crapper, I recieved a phone call from him a couple of days ago letting me know we needed to come up with some kind of plan, he said I needed to come up with atleast $15,000 in 30 days!!!! If I do that he will wait on the rest so I can continue to pay down my debts and refinance me later. He told me if I didn’t, we would have to sell our house because, at this time I still have enough equity to pay him off.

So, after this long story my question is… can he force us to sell our home? I have been loyal in paying my 1st on time without default. I don’t have a problem paying him back, I did borrow the money. It’s not like I’ve ignored the 2nd completely either. I have looked through my paperwork and it doesn’t have any payment address or who to make the payment out to. Can he just all of a sudden demand this money to be paid to him? Can he force my family out on the streets? For a $25,000 debt I had inquired about a number of times and a first that has no default against it.

ENRIQUE

Amanda Hash asked:


Many advise to obtain a cash-out refinance loan when you are in need of cash and you want to obtain inexpensive funding. However, under certain circumstances it is smarter to resort to second mortgages as these loans can provide equally inexpensive funds without altering the conditions of the previous mortgages.

Second mortgages are home equity loans which use the remaining equity on your home to guarantee repayment. Thus, the previous mortgage loan remains unaltered as only the remaining equity is used and not the one used to guarantee the mortgage loan balance. This is particularly important under certain circumstances when the outstanding mortgage loan has very advantageous terms and it makes no sense to refinance it.

Second Mortgages and Home Loans

Second mortgages are loans based on equity that use only the exceeding equity that is not guaranteeing the outstanding mortgage loan as collateral. Thus, with a home equity loan you can obtain additional cash out of your property just like with cash-out refinance home loans but you do not need to touch your outstanding home loan.

Compared to home loans or first mortgages, second mortgages charge slightly higher interest rates and do not offer such advantageous terms. With a home equity loan or second mortgage you will not be able to obtain repayment schedules of up to 30 years like with home loans but you can get up to 15 years without difficulties.

When to Resort to Second Mortgages

Cash-out refinance loans are an excellent option. They provide all the funds you need while refinancing your outstanding mortgage balance. Besides, as home loans they provide very advantageous terms. And you end up with a single monthly payment instead of having two payments like you do with second mortgages.

However, this is true only if your new refinance home loan has better or similar terms as your previous mortgage. Otherwise, refinancing your home loan may not be to your advantage and the cash you obtain from a cash-out refinance home loan may turn out to be significantly expensive compared to getting additional funds with a home equity loan or second mortgage.

For example: If you obtained your current mortgage loan under good credit and market conditions and thus you have a fairly low interest rate, chances are that by refinancing your home loan and due to the fact that you want to obtain additional cash via a cash-out refinance home loan, you will end up paying a higher interest rate.

If the amount of money you still owe on your mortgage loan is significant, you may end up wasting thousands of dollars more towards interests and you need to ponder that when you analyze the costs of refinancing. Instead, with a second mortgage, you are just paying interests for the money you are actually requesting and not also for the amount of your outstanding mortgage that remains with the same interest rate and fees as always. Thus, when analyzing whether you should go for a second mortgage or a cash-out refinance home loan you need to take into account APRs, Outstanding balances and the costs of each financial transaction.



BERNIE

Melissa Kellett asked:


If you have a mortgage loan and you have requested a home equity loan too, you can refinance both loans and get a single loan and a single monthly payment with the same or better terms than the average of both outstanding loans. This can be achieved by applying for a refinance mortgage loan.

Home equity loans, also known as second mortgages, are secured with the same asset as the primary mortgage loan, thus, when refinancing the home loan, you can include your home equity loan. This can provide you with many benefits like getting fewer monthly payments, saving thousands of dollars on interests, getting lower installments and reducing your overall debt exposure.

Refinancing: Concept

As you probably know already, refinancing consists on acquiring a mortgage loan in order to repay an outstanding mortgage. This can be done because the loan contract specifies that the money will be used to cancel the outstanding loan so the new loan will be the primary beneficiary of the security.

The home equity loan is, in this case, also replaced with the new loan and the new loan amount will be determined by adding up the previous mortgage loan amount and the home equity loan amount.

Saving Money? Getting Ease?

By refinancing you can save thousands of dollars on interests. Home equity loans generally come with higher interest rates than mortgage loans and thus, by obtaining a lower rate refinance home loan you will not only be saving money on your mortgage loan but you will also be saving even more money on your home equity loan.

Also, by refinancing you will unify both loans and get a longer repayment program and lower monthly payments. The resulting loan installments will be undoubtedly lower than the combination of mortgage loan payments and the home equity loan payments. Thus, even if you are indebted for a longer period of time you will get a lot of ease on your financial situation and income.

Refinancing Other Debt: Cash-Out Refinance Loans

A cash out refinance loan is a refinance loan with a higher amount than the outstanding mortgage loan and in this particular case than that of the mortgage loan and home equity loan combined. Once both loans are cancelled, the surplus can be used for any purpose you may think of, including reducing your overall debt.

If you have other debt like credit card balances, personal unsecured loans, pay day loans, student loans, car loans or any other loan, you can use this surplus to cancel your debt and thus, you will be saving money due to the lower interest rate that refinance mortgage loans feature.

This will improve your overall credit situation raising your credit rank and improving your credit history. Your debt to income ratio will also be improved just as your debt exposure. Using a cash-out refinance loan in this way is a smart thing and will do a lot to enhance your whole financial situation. Your ability to get finance will also increase since on your credit report, only a single outstanding and affordable loan will show.



RODRIGO