Second Mortgage/home Equity Loan
If you already have a mortgage and want to borrow more money against your home, no one says you have to pay off your existing mortgage. One option is taking out a second mortgage, also known as a home equity loan. Similar to refinancing your original mortgage, you can use LendingTree to get the best rates on a home equity loan.
Technically speaking, the two terms dont mean precisely the same thing. A home equity loan is any new mortgage loan that you take out as an existing homeowner. If you own your home free and clear, you can borrow a home equity loan, which would have first lien position rather than being a second mortgage. But in general discussion, the terms are often used interchangeably.
Pros of Home Equity Loans
One distinct advantage of a second mortgage is that you dont have to restart the amortization schedule from scratch on your first mortgage. In the example above, the borrower has only 10 years left on their mortgage, so restarting the entire loan would come with a huge downside. But with a second mortgage, they can just take out what they need as a new additional loan.
Lender fees can end up being lower for a second mortgage than a refinance. Lenders often charge upfront fees called points, with 1 point equal to 1% of the loan amount. On a $30,000 second mortgage, 1 point is only $300, while 1 point on a $300,000 refinance is $3,000.
Cons of Home Equity Loans
The Bottom Line
Using A Family Loan For A Deposit
Many first time buyers rely on the bank of mum and dad for help getting onto the property ladder.
There are several ways a parent or family member can help a first time buyer get a mortgage, either through an interest-free loan, an investment, or as a gift (find out more on gifted deposits in our guide, but the latter two have tax implications.
A family loan is treated similarly to a conventional loan in that lenders must be happy that the repayments are affordable alongside the mortgage and other outgoings, and any other influencing factors such as credit history.
Although still regarded with some caution by many lenders, family loans are typically looked at slightly more favourably due to the typically lower interest rates and the level of trust instilled by family backing.
However, the individual will stand a better chance of acceptance if they contribute some of their own savings alongside the loan.
Lenders usually require a formal document of terms signed by all parties for any family loan. The document will need to state the terms of the arrangement, including but not limited to what will happen to the money if one of the party dies and what happens if the lender needs the money back, etc.
This is definitely recommended because family arrangements can be tricky and having a contract in place will help prevent conflict if circumstances change later down the line.
Drawbacks Of Using Home Equity
Using home equity doesnt work for everyone in every situation. Drawbacks include:
- Borrowing costs. Some lenders charge fees for home equity loans or HELOCs. As you shop lenders, pay attention to the annual percentage rate , which includes the interest rate plus other loan fees. If you roll these fees into your loan, youll likely pay a higher interest rate.
- Risk of losing your home. Home equity debt is secured by your home, so if you fail to make payments, your lender can foreclose on your home. If housing values drop, you could also wind up owing more on your home than its worth. That can make it more difficult to sell your home if you need to.
- Misusing the money. It is best to use home equity to finance expenses that will pay you back, like renovating a home to increase its value, paying for college, starting a business or consolidating high-interest debt. Stick to needs versus wants otherwise, youre perpetuating a cycle of living beyond your means.
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Can You Borrow Against Your Home To Buy A Property Abroad
In many cases, yes, lenders will allow you to remortgage your home to help you buy another property abroad. If youâre not able to buy the new property outright, youâll need a specialist overseas mortgage. And bear in mind that there will be different property taxes and charges depending on which country the new property is in.
Can I Release Equity To Get A Deposit For A Buy To Let
You can release equity from your house to put down a deposit on another property, but you will usually need significant equity to do this. If you want to let the property, you will need to a buy-to-let mortgage. These mortgages tend to need a 25 per cent deposit, are often interest-only and usually carry higher interest rates and fees. It is a good idea to get financial advice before taking this step.
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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
What Is A Homeowner Loan
A homeowner loan, which is also known as a secured loan or a second charge mortgage, is a loan that is secured against your property.
Homeowner loans can be useful if you want to borrow a large sum of money or have a less than perfect credit history. They are typically used to fund home improvements, consolidate existing debts or to fund large purchases.
A homeowner loan can be used for almost any legitimate purpose. Common purposes for people taking out homeowner loans include Debt Consolidation, Home Improvements, Car Purchase and to pay for a Wedding.
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What Interest Will I Pay
Unlike a regular mortgage, you dont make any monthly repayments with a lifetime mortgage, and the interest builds up on your loan each year. Interest is charged on the total borrowing and any interest previously added, which quickly increases the amount you owe . We add the compound interest to your balance once a year.
So, say you took out a lump sum lifetime mortgage of £30,000 at 4.16% interest. At the end of the first year, the total interest would be £1,248. This would make your outstanding balance £31,248. At the end of the second year, wed charge 4.16% interest, but wed calculate it on the closing balance of the previous year, which was £31,248. This would make the interest £1,300. Wed add that to last years balance, so youd now have an outstanding balance of £32,548.
The loan and interest are repaid in full, usually from the sale of your home, when you pass away or go into long-term care.
The interest rate and the amount that you can borrow will be based on your individual circumstances including your age, health and the current value of your property.
How Do I Borrow From My Home Equity
March 1, 2017 By Chris Hamler
So home prices have gone up and now you have significant equity on your home. The question is, can you use this equity to say, increase your cash flow or fund an important household expense?
The answer is yes. There are various ways through which you can benefit from home value appreciation and take advantage of your propertys earned equity.
But first, lets define terms.
Your equity is the difference between how much your home costs in the market, and how much you have left to pay on your mortgage.
Lets say you took out financing for a home that costs $250,000 and you still owe your lender $150,000 worth of mortgage payments.
$250,000 $150,000 = $100,000
The resulting difference is your home equity.
Lets look at the various ways through which you can gain access to this equity.
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Pros And Cons Of Borrowing Through Credit Cards
If an individual needs to borrow a small amount of money for a short period, a cash advance on a may not be a bad idea. After all, there are no application fees . For those who pay off their entire balance at the end of every month, credit cards can be a source of loans at a 0% interest rate.
On the flip side, if a balance is carried over, credit cards can carry exorbitant interest rate charges . Also, credit card companies will usually only lend or extend a relatively small amount of money or credit to the individual. That can be a disadvantage for those that need longer-term financing or for those that wish to make an exceptionally large purchase .
Finally, borrowing too much money through credit cards could reduce your chances of getting loans or additional credit from other lending institutions.
If used responsibly, credit cards are a great source of loans but can cause undue hardship to those who are not aware of the costs. They are not considered to be sources of longer-term financing. However, they can be a good source of funds for those who need money quickly and intend to repay the borrowed amount in short order.
How Fast Does A Home Build Equity
How fast your home builds equity depends on a number of factors. The easiest and most consistent way to build equity is by making your regular monthly mortgage payments. Each payment will build hundreds of dollars in equity. You can also get more home equity if your home appreciates in value, but this is less reliable, since home values fluctuate over time.
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What Are The Reasons For Remortgaging To Release Equity
People choose to borrow more money against the value of their house for a number of reasons. Bear in mind that not all of these reasons are necessarily good ones, and remortgaging may not be the best solution in each case!
- Home renovations
- Extra income as you retire .
It is worth emphasising that remortgaging to release equity is just another way of borrowing money. This means it puts you deeper in debt, and for a longer period of time than a short-term loan.
How Does Equity Release Work
Equity release is a way of taking out cash from the value of your home, if youre aged 55 or over, without having to move.
Its a long-term loan thats eventually repaid using your home once you pass away, or if you need to go into long-term care. Until then, youll remain a homeowner and wont need to move out.
The type of equity release that we offer is called a lifetime mortgage. You can receive either a one-off lump sum payment or a lump sum, with a cash reserve to draw from in the future.
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Get Equity From Your Home Without Selling It
Your homes equity becomes one of your assets when you buy a house. In the beginning, your equity is equal to your down payment. Over time, your home equity can increase if the value of your home rises. You can also increase your equity by paying down the balance on your mortgage. Learn more about how to estimate your home equity.
Depending on how much equity you have, you can take cash out and use it to consolidate high interest debt, pay for home improvements, or pay for college.
Is Remortgaging Right For Me
Youll need to meet some conditions to be accepted for a remortgage, which generally takes between four to eight weeks to arrange. These include:
- Being up-to-date with your mortgage payments
- Having a loan to value that gives you the scope to borrow more
- Having a good credit rating and the available income to afford the monthly repayments
As with any mortgage application, youll also have to pass the lenders affordability checks to be approved.
You can get an idea of the kinds of remortgage costs on the maket right now with our live table, powered by Trussle.
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Options When You Own A Home With No Mortgage And Want To Buy Another House
Understand that mortgaging your current home isnt always necessary when buying a second home, vacation home, or investment property.
You may already have enough savings for a down payment without tapping into your equity, according to Jon Meyer, The Mortgage Reports loan expert and licensed MLO.
Before getting a mortgage on a house you already own, look into mortgage loans that allow low down payments.
Home buyers should consider the following types of loans.
Equity Lines Of Credit
Another way to use your home equity is through a line of credit that you use like a credit card. Unlike a standard second mortgage where you are given a lump sum at closing, your lender will give you a checkbook or a debit card which you can use to draw your funds from. You are given a limit and can continue borrowing until you reach the ceiling amount.
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What Will Happen To My Mortgage Repayments
If youre borrowing more, your mortgage repayments will obviously increase although this would be offset if your new mortgage has a lower interest rate because the market has changed or because you have a lower LTV than before for example.
To illustrate what you might pay with different mortgage amounts, a £100,000 two-year fixed-rate mortgage on a £200,000 home with 20 years left to run could cost you from £471 a month remortgaging at current rates. If you borrowed £120,000 instead you would have to pay £565 a month an extra £94.
But if you increase your mortgage by another £70,000 to £190,000 your repayments would go up to a hefty £1,002 a month an extra £531 compared with a £100,000 loan. Not only would you have to pay more because your mortgage amount has increased but you would have to get a more expensive deal because your LTV would have gone from 60% or less to 95%.
You could lengthen your mortgage term to minimise the increase but youll be paying even more interest overall because youll be borrowing the money for longer.
What About Equity Release Pitfalls For Debts Inheritance And Tax Benefits
Our lifetime mortgage has a no negative equity guarantee, which means you won’t be leaving your loved ones with debt from our lifetime mortgage. Provided your property is sold for the best price it can reasonably get, you and your estate wont ever have to repay more than the money received from the sale.
Although you can safeguard some of your homes value as inheritance, its sale will go towards paying off your lifetime mortgage so the inheritance that you leave behind will reduce, which is something you may want to consider.
Bear in mind also that releasing equity can change your tax position and potentially alter your eligibility for welfare benefits . A financial adviser will help to explain what this might mean for you thats why its so important to get equity release advice, because everyones financial needs are different.
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How To Use Our Mortgage Payment Calculator
The first step to determining what youll pay each month is providing background information about your prospective home and mortgage. There are three fields to fill in: home price, down payment and mortgage interest rate. In the dropdown box, choose your loan term. Dont worry if you dont have exact numbers to work with use your best guess. The numbers can always be adjusted later.
For a more detailed monthly payment calculation, click the dropdown for Taxes, Insurance & HOA Fees. Here, you can fill out the home location, annual property taxes, annual homeowners insurance and monthly HOA or condo fees, if applicable.
Using A Mortgage Or Line Of Credit To Invest
Lines of credit or mortgages on real estate can be used to invest, and the interest can be tax-deductible as well. An important distinction is that it is the use of borrowed funds that determines tax deductibility. Borrowing money against a rental property does not make the interest automatically tax-deductible if the funds are used for a personal purpose. Borrowing money to invest in stocks, bonds, mutual funds, exchange-traded funds, a rental property, or a business are common criteria for interest deductibility.
Interest for funds used to finance an income property can be deducted on your tax return, including money borrowed against a personal-use property like a home or cottage, if the funds are used towards a down payment, renovation, or other costs for a rental property that earns rental income.
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Borrow Using A Personal Loan
Personal loans are pretty much the fastest-growing form of consumer lending, at least in the U.S. Personal loans are such a used method because they are very helpful, mostly because depending on the type of personal loan you get, you wont be asked what you are going to use the loan for. The lender cares about whether you can repay it or not, so they look at your and anything of the sort.
Using a personal loan is rarely accepted as a form of down payment, though. The problem doesnt come from the lender but from the mortgage companies. The reason is the fact that you are basically taking new debt in order to be able to pay for your existing one. This may be a sign that you will be unable to afford the home loan. Down payments are required as proof that you have financial stability for this.
There are rare cases when a personal loan may be allowed, though and were talking about extreme situations. In general, it can be used when you are moving for a job, and when you have money coming in, but you really need to make an offer at this moment.
- Its a good option in emergency situations
- Lenders dont care what you use the loan for
- Most of the time, it is not accepted as a down payment