Home Equity Line Of Credit
With a home equity line of credit , you have the option to borrow up to an approved credit limit, on an as-needed basis. In that regard, a HELOC functions more like a credit card.
With a standard home equity loan, you pay interest on the entire loan amount, but with a HELOC, you pay interest only on the money you actually withdraw.
The fixed interest rate on a home equity loan means you always know what your payment will be, while the variable rate on a HELOC means the payment amount varies.
Currently, the interest you pay on home equity loans and HELOCs is not tax-deductible unless you use the money for home renovations or similar activities on the residence that secures the loans. Before the Tax Cuts and Jobs Act of 2017, interest on home equity debt was all or partially tax-deductible. Note that this change is for tax years 2018 to 2025.
In additionand this is an important reason to make this choicewith a home equity loan, your home remains an asset for you and your heirs. Its important to note, however, that your home acts as collateral, so you risk losing your home to foreclosure if you default on the loan.
Take Out A Home Equity Line Of Credit
A home equity line of credit gives you the option to borrow up to your approved credit limit on an as-needed, or revolving, basis. Unlike a home equity loan, where you pay fixed interest on the entire loan amount whether youre using the money or not, with a HELOC you pay interest only on the amount of money you actually withdraw. HELOCs are adjustable loans, meaning your monthly payments will change as interest rates fluctuate.
The rules about tax-deductibility and qualified purposes are the same as for a home equity loan described above. A HELOC retains your home as an asset for you and your heirs. Nevertheless, as with a home equity loan, your home serves as collateral and could be foreclosed if you default.
Creating A Winning Strategy
If youre interested in paying for a second home with the reverse mortgage on your primary residence, you should research reputable reverse mortgage lenders who service your area AND try to enlist the help of a professional financial advisor. When you work with experienced professionals, they can help you develop a homeownership strategy that will work best for your situation.
For example, you may be able to take out a reverse mortgage to simply lower the payments on your existing primary residence, thus freeing up money to make payments on a conventional loan for a second home. Or, you may be able to use the lump sum proceeds from your reverse mortgage to pay in full for a vacation property.
Again, these scenarios will not be ideal for everyone. Talk to a reverse mortgage specialist at Alpha Mortgage or contact a homeownership counselor for more information.
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Whats A Reverse Mortgage Calculator & How Does It Work
A reverse mortgage calculator is a financial tool that is used by either your financial adviser or lender to calculate what you can borrow.
Reverse mortgage calculators consider your age and property value each lender will have a calculator based on its criteria.
There are also online reverse mortgage calculators on our site that you can use to estimate how much you can borrow and what sort of interest rate you could get.
How Much Equity Can I Use To Buy A Second Home
There is no fixed amount of equity you can utilise to help you in buying a second home. It will depend on your financial situation and proving you can meet the payments. However, the maximum amount of equity a lender will allow you to access is between 80% and 85%. So you will not be able to use more equity than this in most cases.
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Using A Reverse Mortgage To Buy Property
A reverse mortgage is the opposite of a standard mortgage. Instead of buying a home, youre selling yours. It is an option for over 55s who own their existing property outright but want to buy more real estate, possibly for a younger family member.
They can receive a large cash loan based on the value of their property. This money is only repaid if the property is sold or when they pass away from their estate .
What Is The Difference Between Hecm And Reverse Mortgage
The U.S. has only one reverse mortgage insurance policy. To take advantage of the FHA-approved Home Equity Conversion Mortgage, your lender must be approved by the Federal Government as well. Reverse mortgages are provided by the Federal Housing Administration in which some of your own debt can be withdrawn.
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Who Would Benefit From A Reverse Mortgage
People who would benefit from a reverse mortgage are retirees who find themselves in the following positions:
- Their retirement costs have risen and become significant compared to their income.
- Their savings have been depleted, but a large amount of equity is locked up in their home.
- They dont have any heirs to leave their homes to.
Its always important to discuss your financial situation with your financial adviser, who would be best suited to tell you if a reverse mortgage will benefit you.
You Can Afford Ongoing Costs
Keeping up with your property taxes, homeowner’s insurance, and home maintenance is essential if you have a reverse mortgage. If you fall behind, the lender can declare your loan due and payable.
If you dont pay your property taxes for long enough, the county tax authorities can place a lien on your home, take possession, and sell it to recoup the taxes owed. The tax authoritys claim to your property supersedes the lenders. So, if you dont pay your property taxes, youre putting the lenders collateral at risk.
Not paying your homeowners insurance premiums also puts the lenders collateral at risk. If your house burns down, theres no insurance to pay the costs of rebuilding. Your lender doesnt want to get stuck with a burned-out shell of a home that isnt worth nearly what you owe on the reverse mortgage.
Not keeping up with home maintenance also causes your home to lose value. If you dont replace a failing roof, for example, your home could end up with extensive water damage after it rains or snows. Prospective buyers would pay a lower price than they would for similar houses in good repair in your neighborhood. The need to spend money to replace the roof and fix the water damage to return the home to a good condition may deter buyers altogether.
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How Does A Second Mortgage Work When It Comes To Qualifying
Second mortgage lenders tend to care more about the amount of equity in your home than your income or credit score. So if youre interested in a second mortgage, it is important to understand how much equity you have in your home. If you do qualify, you may be wondering, how does a second mortgage work when I want to pay it back? Typically terms for second mortgages are for a year or two, during which you normally pay just interest payments. At the end of the term you need to pay back the total, extend the loan for another term or take out a new second mortgage to pay it off.
Buying A Second Property With A Mortgage
If you decide to rent out the property later, youll need to get permission from the lender, so if you think you might want to do this in the future check that your lender would allow it and what would be involved. There may be extra costs.
If you buy a second property that becomes your main home, you should inform HM Revenue and Customs within two years. This is to ensure you avoid paying capital gains tax on it if you sell the property later. CGT is a tax that applies when you sell a property that’s not your ‘main home’ so would still have to pay it on your other home if you sold it.
You could also get a mortgage to buy a second property abroad to use as a holiday home. However, you would need to speak to a broker specialising in overseas mortgages as most UK lenders dont lend on properties outside the UK. You may also now find it harder to get a mortgage to buy a property in the EU as a result of Brexit.
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Which Property Types Qualify For The Hecm For Purchase Program
Generally speaking, you can use an HECM reverse mortgage to purchase any sort of property that you could normally get a Reverse Mortgage on. These property types include:
- Single and Multi Family Homes
- Town Houses
- FHA-Approved Condominiums
- FHA-Approved Manufactured Homes
As with normal reverse mortgages, you cannot use the HECM to purchase other types of properties such as:
- Bed & Breakfast establishments
- Condominiums, Mobile or Manufactured homes that have not been certified for Reverse Mortgages by the FHA
What Is Equity Release
Equity release allows you to access some of the tax-free cash locked in the value of your home. Its most common form is a lifetime mortgage, which is a loan secured against your property.
With our lifetime mortgages, you can access between £10,000 and £1.5 million while still retaining full ownership of your home and having no monthly repayments unless you choose to.
With a lifetime mortgage there are typically no monthly repayments to make as the loan, plus roll up interest, is repaid when the plan comes to an end.
That means you could give your later life finances a boost, all the while ensuring your home remains your home.
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You Can’t Afford The Costs
Reverse mortgage proceeds may not be enough to cover property taxes, homeowner insurance premiums, and home maintenance costs. Failure to stay current in any of these areas may cause lenders to call the reverse mortgage due, potentially resulting in the loss of one’s home.
On the bright side, some localities offer property tax deferral programs to help those age 65 and over with their cash-flow, and some cities have programs geared toward helping those age 65 and over with fewer comparative resources with home repairs, but no such programs exist for homeowners insurance.
Is Now The Right Time
Home values across the country have been hit hard during the economic downturn, which could make it a great time to purchase a second home.
In areas such as Florida and Arizona, home prices are down 48% from their peak, according to a report from CoreLogic .
There is a large segment of baby boomers who are interested in purchasing a second home, according to a survey from Coldwell Banker Real Estate. The survey found that 34% of agents said younger baby boomers are interested in purchasing a second home. Older boomers are a little less interested, with about 22% of older baby boomers interested in purchasing a second home.
In addition to lower home values across the country, mortgage rates are experiencing 60-year record lows. Zillow reported in July that 30-year fixed rate mortgages are at 3.35%, the lowest the company has ever seen since it began tracking mortgage rates in 2008.
Even though it might be an attractive time to purchase a second home, its important to seriously consider whether you can afford the additional financial obligations.
A reverse mortgage is a serious financial decision and its important to use the equity in a way that is beneficial during your retirement years.
Have a question about using a reverse mortgage to purchase a second home? Dont hesitate to reach out to us today.
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What To Ask A Lender About Reverse Mortgages
Before getting a reverse mortgage, ask your lender about:
- how you can get the money from a reverse mortgage
- if there are any fees you have to pay
- what interest rate you have to pay on the money you borrow
- what can cause you to default on the loan
- any penalties you have to pay if you sell your home within a certain period of time
- how much time you have to pay off the loans balance if you move
- how much time your estate has to pay off the loans balance if you die
- what happens if it takes your estate longer than the stated period to fully repay the loan when you die
- what happens if the amount of the loan ends up being higher than your homes value when it’s time to pay the loan back
Learn The Situations Where This Strategy Does And Doesn’t Make Sense
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A reverse mortgage is a type of mortgage loan that’s secured against a residential property that can give retirees added income by giving them access to the unencumbered value of their properties.
Homeowners who are short on cash and find their home equity is their biggest asset might consider a reverse mortgage when they dont have any other viable way to raise money for daily living expenses. In this case, they may want to take out a reverse mortgage.
However, this action is not a decision to make lightly because it’s probably taken years of hard work to accumulate your home equity taking out a reverse mortgage means spending a significant part of that equity on loan fees and interest.
Some of the disadvantages to this approach include hefty fees and high-interest rates that can cannibalize a substantial portion of a homeowners equity.
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No Plans To Bequeath Your Home
Some people dont choose to leave their home to anyone, except their spouse if they’re married. If you dont have childrenor your kids are financially successful and inheriting your home wont make a meaningful difference in their livesthen you probably have no specific plans for bequeathing the home.
Maybe because you worked hard to pay for your home, you just want to cash in your equity and spend it all before you die. Youre perfectly entitled to do so.
Upon your death , your loan becomes due and payable. Heirs who want to take possession of the house have the opportunity to pay the reverse mortgage balance to the lender and take back the title. However, they cant always do this. They may not have the cash or qualify to get a regular mortgage to buy your home.
If your heirs dont purchase the home, the lender will sell it on the open market to recoup the money it has lent you through the reverse mortgage. Any positive balance between the sale proceeds and what you owed goes to your estate. If theres a negative balance, Federal Housing Administration insurance covers it. So if youre not concerned about leaving your home to anyone, getting a reverse mortgage might be a good way to get cash.
Maggie And Robs Borrowing Decision
Since both the borrowing costs and prepayment charges are lower with Equitable Bank, Maggie and Rob chose the Flex Reverse Mortgage. With a five-year fixed interest rate of 4.89%and benchmark property values in Greater Vancouver that increased by more than 12% in just the past six months, according to statistics from the Canadian Real Estate Associationthey will almost certainly continue to see strong gains on their Kitsilano property.
A home is often one of the best-performing assets in an investors portfolio and, with interest rates so low, owners and financial planners are certainly making that calculation, says von Martels. They are realizing a reverse mortgage might be a lot more cost-efficient than sellingespecially since fixed-income returns on products like GICs are currently really dismal.
All in, it took the couple 37 days from initial call to receiving their reverse mortgage funding, including a week of vacation where nothing happened. The total cost of arranging the mortgage was $3,300, including appraisal, legal costs and a $995 setup fee to Equitable Bank.
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What Is The Catch On A Reverse Mortgage
A reverse mortgage doesnt automatically provide the holder with benefits. A reverse mortgage does not require that you pay an upfront fee. As long as you take out the home loan until you leave, you are not obligated to make monthly payments, so the balance rises rather than falls as it would be if you were making them.
How Home Equity Release Works
Equity is the value of your home, less any money you owe on it .
Home equity release lets you access some of your equity, while you continue to live in your home. For example, you may want money for home modifications, medical expenses or to help with living costs.
Ways to access equity in your home include:
- reverse mortgage
- the Governments Pension Loans Scheme
The amount of money you can get depends on:
- your age
- the value of your home
- the type of equity release
Your decision could affect your partner, family and anyone you live with. So take your time to talk it through, get independent advice and make sure you understand what youre signing up for.
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What Is Home Equity
Home equity is a monetary sum that you own in your home, as opposed to a mortgage balance that you still need to pay off. You can work out how much home equity you have by subtracting your existing mortgage balance away from the current value of your home. Do not use the amount you purchased your home for as this may no longer reflect its current value.
Home equity is easily understood with a simple example. If you own a property worth £300,000 and you have £100,000 left to pay on a mortgage, you therefore have £200,000 equity in your property.