Pros And Cons Of Home Equity Loans
There are several advantages to home equity loans that can make them attractive options for homeowners looking to reduce their monthly payments and simultaneously release a lump sum. Refinancing with a home equity loan can offer:
- Lower, fixed interest rates than your previous mortgage
- Lower monthly payments due to lower interest rates and a smaller principal
- A lump sum that can be used for any purpose, including renovations and improvements to your property that, in turn, can raise its value
On the other hand, home equity loans come with risks that you should be aware of:
- Your home secures the loan, so your home is at risk if you fall behind on your loan repayments.
- With a traditional home equity loan, you have to borrow a set amount of money. If you dont end up needing the whole amount, you can be stuck paying interest on a portion of the loan you dont use. This is why HELOCs are a better option for homeowners who need to cover ongoing, unpredictable expenses.
- You cant get a home equity loan with too much debt or poor credit. This bars some people from being able to access the equity in their homes.
Mortgage lending discrimination is illegal. If you think youve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau and/or with the U.S. Department of Housing and Urban Development .
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Pros And Cons Of Using Equity To Buy Another Home
Before you use a home equity loan for a second home, consider the pros and cons of taking equity out of your home to buy another house.
Pros
- Youll reserve your cash flow. Using home equity to buy a second home keeps cash in your pocket that you would otherwise use for the home purchase. This increased cash flow can result in a healthier emergency fund or go towards other investments.
- Youll increase your borrowing power. Buying a house with equity will allow you to make a larger down payment or even cover the entire cost making you the equivalent of a cash buyer.
- Youll borrow at a lower interest rate than with other forms of borrowing. Home equity products typically have lower interest rates than unsecured loans, such as personal loans. Using home equity to purchase a new home will be less expensive than borrowing without putting up collateral.
- Youll have better approval chances than with an additional mortgage. Home equity loans are less risky for lenders than mortgages on second homes because a borrower’s priority is typically with their primary residence. This may make it easier to get a home equity loan to buy another house than a new separate mortgage.
Cons
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What If I Have A Second Mortgage On My Home Can I Still Refinance
Typically, any second mortgages are paid off through the refinance. You can consolidate both loans into one new first mortgage and you will only have one payment each month.
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Home Equity Lines Of Credit
A home equity line of credit is a type of second mortgage that gives you continuous access to funds at a variable rate. Youll start out with a draw period when you take out a HELOC during this time, you can usually spend up to your credit limit without having to make any payment aside from your accumulated interest. You pay back the remaining balance in monthly installments after the draw period ends.
Rocket Mortgage® does not offer HELOCs.
Second Home Mortgage Rates
Owning a second home means avoiding those creepy short-term home rental disappointments and those nothing-to-do-this-weekend blues. Its your place, only better. Its somewhere cool.
Finding the best loan offer for your second home begins with shopping mortgage rates. With the NerdWallet second-home mortgage rate tool, punch in a little data and youre combing through interest rate offers in no time.
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How Borrowing On Home Equity Works
You may be able to borrow money secured against your home equity. Typically, interest rates on loans secured against home equity can be much lower than other types of loans.
Not all financial institutions offer home equity financing options. Ask your financial institution which financing options they offer.
You must go through an approval process before you can borrow against your home equity. If youre approved, your lender may deposit the full amount you borrow in your bank account at once.
You can borrow up to 80% of the appraised value of your home.
From that amount, you must deduct the following:
- the balance on your mortgage
- your total HELOC amount, if you have one
- any other loans secured against your home
Your lender may agree to refinance your home with the following options:
- a second mortgage
- a loan or line of credit secured with your home
Know What You’re Starting With
To understand what happens when you consolidate you have to know a few things about the current loans you have. If, when you go to consolidate loans, you realize that your second mortgage was used to pull cash out of your home for some reasoncalled a cash-out loanit may add cost to the new loan and reduce the amount for which you qualify. Cash-out loans are priced higher, lenders say, because the borrower is statistically more likely to walk away from the loan if they get in trouble.
Then there is the rate/term refinance . This type of loan is simply an adjustment on the interest rate and terms of your current loan. The loan is considered safer to the lender because the borrower isnt pocketing any money or reducing the amount of equity they have in the property. You may have refinanced recently when mortgage rates dropped to historic lows. A mortgage calculator can be a good resource to budget for the monthly cost of your payment.
Why do these distinctions matter? According to Casey Fleming, branch manager at Fairway Independent Mortgage Corporation and author of The Loan Guide: How to Get the Best Possible Mortgage, they are important because the terms and the amount you will pay on new mortgages could be very different.
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Talk To Your Existing Lender
The first lender you should speak with is the one that currently holds your second mortgage. See if they are willing to refinance the loan and what the requirements are. In some cases, you may snag the best refi terms with your existing lender since youre already a customer they know your loan situation and usually dont want to lose the account entirely.
When Should I Get A Second Mortgage
Second mortgages arent for everyone, but they can make perfect sense in the right scenario. Here are some of the situations in which it makes sense to take out a second mortgage:
- You need to pay off credit card debt. Second mortgages have lower interest rates than credit cards. If you have many credit card balances spread across multiple accounts, a second mortgage can help you consolidate your debt.
- You need help covering revolving expenses. Do you need revolving credit without refinancing? Unlike a refinance, HELOCs can give you access to revolving credit, as long as you keep up with your payments. This option can be more manageable if youre covering a home repair bill or tuition on a periodic basis.
- You cant get a cash-out refinance. Cash-out refinances, compared to home equity loans, usually have lower interest rates. But if your lender rejects you for a refinance, you may still be able to get a second mortgage. Consider all of your options before you get a second mortgage.
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Other Considerations For Refinancing Your Second Mortgage
As you consider refinancing the second mortgage, you want to make sure it is a good time to do so. Rates tend to vary, and in many cases, lenders charge a refinance fee that can be anywhere from 3% to 5% on the total mortgage. If you don’t have much savings or the cash on hand that you would earn with a lower interest rate, it may not be the best time to refinance.
You also want to determine what the qualifications are when considering a second mortgage refinance. Lenders take a look at property value, and if your loan to buy is not within the lender’s preferences, you may not qualify for a refinance.
One other consideration is your current finances. Your credit score and debt-to-income ratio will play a significant role in refinancing your second mortgage. The process can involve a considerable amount of documentation related to your income and debt, so be prepared by having this easily accessible.
Lendtoday: Your Resource For All Your Second Mortgage Needs
At LendToday, our experts help people qualify for the loans they need. Even if you don’t qualify with your bank, we will work with you to find the right second mortgage or financing solution to meet your needs. We base our decisions on your equity, so you owe it to yourself to apply for a mortgage where you’ll be approved. We don’t make judgments. Mortgage solutions can help to repair credit and start your financial rehabilitation. There are options available if you have filed a bankruptcy or consumer proposal, lost your job, or maxed out your credit. We look forward to assisting you. Apply online today, and we’ll get back to you within 24 hours. Living your dreams — we can help with that!
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Should You Get A Second Mortgage Or Refinance
Whether you should refinance or take out a second mortgage depends on your situation and your goals. Here are two scenarios:
- You need money for a major expense. If your goal is to access funds to cover a large expense, you could opt for either a cash-out refinance or a second mortgage. If flexibility is a concern, such as a major home renovation that could have unpredictable costs, a second mortgageespecially a HELOCcould be a better fit than a cash-out mortgage.
- You want a better mortgage interest rate. If your goal is to reduce your mortgage payment, your best bet is to do a rate-and-term refinance. Perhaps market conditions have led to significantly lower interest rates, or your credit has improved significantly and you could qualify for a better rate now. Unlike a cash-out refinance or second mortgage, you don’t get money to spend, but you get a new mortgage with more favorable terms.
How Much Can I Borrow
A HELOC lets you borrow up to 80% of your home’s value, while a private mortgage home equity loan lets you borrow up to 95%. This is after accounting for your existing first mortgage loan. However, not all private lenders allow a max LTV of 95%. In any case, the smaller your existing first mortgage, the larger your second mortgage can be.
For example, let’s say that:
- Your home value is $500,000
- You have an existing $200,000 mortgage
How much can you borrow with a HELOC?
- $500,000 x 80% HELOC limit = $400,000 maximum
- $400,000 maximum – $200,000 existing mortgage = $200,000 HELOC limit
- With a HELOC, the maximum amount that you can borrow is $200,000
How much can you borrow with a home equity loan from a private lender?
- $500,000 x 95% home equity limit = $475,000
- $475,000 maximum – $200,000 existing mortgage = $275,000 home equity loan limit
- With a home equity loan from a private lender that allows a maximum LTV of 95%, the maximum amount that you can borrow is $275,000
To find out how much you can borrow with a second mortgage, you can use asecond mortgage calculator.
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How To Refinance Your Mortgage
Considering refinancing? We highly recommend speaking with an advisor who can review your financial picture and help determine if refinancing is the right financial move for you. In the meantime, here are the steps to refinancing your mortgage:
1. Understand why you want to refinance.
Is refinancing the right option for you? Take a look at our list of some of the benefits and considerations to determine if itâs the best way to reach your goals.
2. Figure out your timing.
Is it worth breaking your current mortgage early or can you wait until itâs time to renew? If you can wait until the end of your mortgage term, there will be no penalties for breaking your mortgage early. If you need to break the mortgage during its term, be sure you understand the costs involved.
3. Determine what you want to replace your current mortgage with
RBC Homeline Plan
The RBC Homeline Plan combines your RBC Mortgage and Royal Credit Line into one product that allows you to access the equity you have in your home. And, it gives you the flexibility to use funds in a way that best suits your needs. Learn more about the benefits of an RBC Homeline Plan.
Blend and extend your current mortgage
RBC can offer you a blended rate on your mortgage, which is essentially a blend of your current mortgage rate plus any additional money you borrow at current market rates.
4. Connect with an RBC Financial Advisor
Find Out If You Qualify
Its essential to talk to an expert about whether you are eligible for a refinance on your second mortgage. Your lender might look at your property value to ensure it meets minimum required LTV ranges. They will also look at your credit score and other financial documents to decide if you are eligible for a refinance.
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The Cost Of Refinancing Your House
In general, refinancing includes the following closing costs outlined below:
Application fee. Lenders impose this charge to cover the cost of checking a borrowers credit report, and the initial cost to process the loan request.
Title insurance and title search. This charge covers the cost of a policy, which is usually issued by the title insurance company, and insures the policy holder for a specific amount, covering any loss caused by discrepancies found in the property’s title. It also covers the cost to review public records to verify ownership of the property.
Lender’s attorney review fees. The company or lawyer who conducts the closing will charge the lender for fees incurred, and in turn, the lender will charge those fees to the borrower. Settlements are conducted by attorneys representing the buyer and seller, real estate brokers, escrow companies, title insurance companies and lending institutions. In most situations, the individual conducting the settlement is providing their services to the lender. Borrowers may be required to pay for other legal fees and services related to their loan, which is then provided to the lender. They may want to retain their own attorney for representation in the settlement, and all other stages of the transaction.
What Are The Advantages Of A Second Mortgage
When you take on a second mortgage, you may enjoy several advantages, including:
- Keeping current loan terms: If your primary mortgage has a great interest rate, you can keep this rate when you secure a second mortgage, as a second mortgage wont replace your existing loan. Rather than change your current loan terms, a second mortgage will add an extra payment to your monthly expenses.
- Paying fewer closing costs: With a second mortgage, a home equity loan lender tends to cover most or all of your closing costs. Since you may not have to pay closing costs at all, you can save thousands of dollars.
- You can select whether you want a HELOC or a home equity loan. If you want a lump sum, you may want to select a home equity loan. If you want to tackle a home renovation or another ongoing project and you dont know exactly how much money you may need, you may want to choose a HELOC instead.
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