Posted on: 05th Oct, 2005 04:38 am
Getting and managing a second mortgage may not sound tough if you've already taken out a loan against your home. However, there are loopholes that you should avoid. So, prior to getting a second loan, take a look at the 10 big mistakes that can make things worse for you.
1. Not being aware of Home equity loans and HELOCs
Home equity loans and HELOCs are both second mortgages taken out against your home equity. Home Equity loans can be either fixed or adjustable, while HELOCs are only available as adjustable rate loans. In addition, Home equity loans are one-time loans, while HELOCs are revolving lines of credit.
Moreover, the purposes of these loans are different. For example, a home equity loan is designed to help you consolidate debts or make home improvements, but when it comes to fulfilling your periodic needs, HELOC is better. All you need is a basic understanding of both the loans to make them work for you.
Moreover, the purposes of these loans are different. For example, a home equity loan is designed to help you consolidate debts or make home improvements, but when it comes to fulfilling your periodic needs, HELOC is better. All you need is a basic understanding of both the loans to make them work for you.
2. Taking out a large credit line
Think twice before you take out a large credit line. How much your line of credit is for will be taken into account when you apply for other loan and can possibly get rejected too.
Most often your credit line payments are determined on the basis of your total credit liability even though you have not taken out any money from your line of credit. A large credit line implies large payments that may affect your ability to repay the second mortgage as well as other loans.
Most often your credit line payments are determined on the basis of your total credit liability even though you have not taken out any money from your line of credit. A large credit line implies large payments that may affect your ability to repay the second mortgage as well as other loans.
3. Not shopping enough for the best loan
You may decide to take out the loan from the bank where you have a checking account. But if you wish to get the best loan for your needs, look one that can give you some benefits and help you save due to lower interest rates.
Therefore you should shop around and get quotes from other lenders/brokers to see what else you can get before comparing and choosing the best one.
Therefore you should shop around and get quotes from other lenders/brokers to see what else you can get before comparing and choosing the best one.
4. Not asking for a Good Faith Estimate
It's your lender's responsibility to provide you with a Good Faith estimate (GFE) after you apply. A GFE provides you with a breakdown of all the fees involved so you can be assured that you will not be paying any hidden fees or costs. So, even if your lender forgets, just remind them that you are yet to receive a GFE.
5. Thinking a second mortgage costs you less
You may have to pay less on a second mortgage than if you are managing a credit card. To find out which is better, you need to consider the interest rates on credit cards and compare it with the rate on a second mortgage after taking into account the tax deduction. For example, if you have taken a HELOC. Its effective rate is:
Effective rate = rate* (1 - tax bracket)
If your tax bracket is 30% and the actual rate on the credit line is 15%, then,
Effective rate is = 15% * (1 - 0.3) = 15% * 0.7 = 10.5%
Now, if your credit card interest rate is higher than 10.5%, then the second mortgage will be cheaper to manage.
Effective rate = rate* (1 - tax bracket)
If your tax bracket is 30% and the actual rate on the credit line is 15%, then,
Effective rate is = 15% * (1 - 0.3) = 15% * 0.7 = 10.5%
Now, if your credit card interest rate is higher than 10.5%, then the second mortgage will be cheaper to manage.
6. Going for second mortgage when you plan to refinance
Lenders may not allow a first mortgage refinance when you already have a second loan on the same property. They may look at the combined loan amount even if you refinance only the first loan.
Lenders may either ask you to pay off both the loans completely or pay down the second loan when you refinance. However, they may allow you to keep the second loan if you can get a subordination agreement from the second mortgage lender.
This agreement ensures that the second loan has a lower priority with respect to the new refinance loan. Thus, you need to consult the lender offering the refinance loan as to whether they will allow you to keep the second mortgage. You can also compare the rates on the refinance and the second loan to find out if it makes sense to keep the second mortgage and refinance the first or refinance both into a single loan.
Lenders may either ask you to pay off both the loans completely or pay down the second loan when you refinance. However, they may allow you to keep the second loan if you can get a subordination agreement from the second mortgage lender.
This agreement ensures that the second loan has a lower priority with respect to the new refinance loan. Thus, you need to consult the lender offering the refinance loan as to whether they will allow you to keep the second mortgage. You can also compare the rates on the refinance and the second loan to find out if it makes sense to keep the second mortgage and refinance the first or refinance both into a single loan.
7. Being unaware of second mortgage tax deduction
Your home equity loan/HELOC may not be fully tax-deductible and you can't always trust the lender to give you the correct information. If you want to take advantage of any tax deductions, you should consult a tax advisor or a CPA.
8. Use Heloc to pay off credit card debts
If you have taken out a HELOC to pay off credit card debts, make sure that you don't completely exhaust the available credit limit. You may find it hard to make the payments on time.
9. Being unaware of a prepayment penalty
There may be a prepayment penalty clause in the second mortgage agreement that could cost you a lot of money if you try to sell or refinance your home and pay off your mortgage early.
10. Not knowing about life caps
Usually home equity lines of credit have life caps where the interest rate can go up much higher than you expected. So, plan your budget and keep a cash reserve if you need it.
No matter why you need money, getting a second mortgage can be a good way to get it. But in order to avoid a second mortgage trap, you should know what you're getting into before you take out a home equity loan or a HELOC.
I am presently investing in hair salons as an owner. I have invested my life savings & now I need more cash for payroll. I have credit cards totaling $66,000 that are paying bills for the 2 salons that I opened on May 1st. Revenue is beginning to flow but not enough to cover rents & payrolls as wwll as the bills. I owe 112,000 on my home & have an income of approx. 75,000 as a teacher. I need 40,000-50,000 to get time to build up these businesses. SBAs arent available to new businesses.
recently i purchased 2 hair salons investing my life savings into the start up of them. I now need cash for payroll, rents & various other bills that wont take credit cards as payment...i owe 112,000 on my home that i pruchased ayear ago for 142000; i have an income of 75000 as a teacher; i owe on credit cards - personal & business approx. 63,000; i would to get 40000 to keep the salon alive as they start to bring in revenue; is this possible
sorry mary, but your timing could have been better. using your "life savings" was probably a bad move. it would seem you lack equity to take enough money out of your home at this time, and your lack of cash flow certainly isn't going to convince someone to lend you $40K.
i'd say it'd be wise to contact the small business administration - i sure hope you've got experience in the salon business.
i'd say it'd be wise to contact the small business administration - i sure hope you've got experience in the salon business.
hi jessica:
i have 85k saved for a down paymment on a 650k home. the consensus among lenders is that i would be better off coming up with 45k more in order to make a complete 20% downpayment. would it be a good idea to to take out second mortgage mortgage or a heloc on my current home (which i plan to rent out) to come up with the 45k.
what is the best option if i want to go ahead with buying a home at that price?
mike
i have 85k saved for a down paymment on a 650k home. the consensus among lenders is that i would be better off coming up with 45k more in order to make a complete 20% downpayment. would it be a good idea to to take out second mortgage mortgage or a heloc on my current home (which i plan to rent out) to come up with the 45k.
what is the best option if i want to go ahead with buying a home at that price?
mike
Yes, that would be a good solution as long as you can find the right bank with the right programs to make that work.
In addition, make sure you can qualify for the new loan with all of that debt.
In addition, make sure you can qualify for the new loan with all of that debt.
I am in the process of refinancing and have discovered I have equity, I have high interest rate credit cards. Would you recommend a second mortgage or heloc.
hi guest!
welcome to forums!
in my opinion, refinance would be a better option compared to second mortgage. if you take a second mortgage, you would become liable for two mortgages. a refinance will help you in paying off the earlier loan and you would get extra money due to the equity and pay off your unsecured debts.
feel free to ask if you've further queries.
sussane
welcome to forums!
in my opinion, refinance would be a better option compared to second mortgage. if you take a second mortgage, you would become liable for two mortgages. a refinance will help you in paying off the earlier loan and you would get extra money due to the equity and pay off your unsecured debts.
feel free to ask if you've further queries.
sussane
i'm not sure i explained myself correctly. in the process of applying for a refinance loan to lower my monthly payments, i discovered i have more equity than i thought. realizing this i wonder if i couild use this money to pay off credit cards, however i don't know how to go about this. should i take this money as an equity line of credit or take out a second mortgage or home equity loan? i would like to make a decision soon before the refinance is complete.
Hi Guest,
As you want to pay off your credit card debts, I think a home equity loan would be a better option for you. However, the equity in the property will not help you in getting the loan, you should also have good credit score and a stable income for the same.
Thanks.
As you want to pay off your credit card debts, I think a home equity loan would be a better option for you. However, the equity in the property will not help you in getting the loan, you should also have good credit score and a stable income for the same.
Thanks.
why can't i take out a home equity loan on a house i rent out
You'll be able to get a home equity loan if your property has any kind of equity in it. Does your rental/investment property has any kind of equity?
Yes, we did it, the credit card people herrassed us so badly, we took and put up our home for a secound morgage. Now we can't afford it and we are paying so much amonth the payments are more that the house is worth. What to do??
I have home, only owe $37,000. interest rate is 8.75. Want to refinance at lower rate and borrow to purchase 2nd home at same rate combined with 1st mortgage.
To Anita,
If you are unable to pay the second mortgage dues, the lender will have the right to foreclose the property or charge off your account to a collection agency. Both will affect your credit report. As you are unable to pay the mortgage dues, you should contact your second mortgage lender and apply for a loan modification.
To djmoz,
If you want to buy a second home, you will have to use it as a collateral and get a mortgage on it. Moreover, lenders are generally not ready to give you a mortgage to buy a new property if you already have a mortgage.
As far as your first mortgage is concerned, you will be able to refinance the loan depending upon your financial situation and credit report. You should only refinance if you are planning to stay in the property for a long period of time.
If you are unable to pay the second mortgage dues, the lender will have the right to foreclose the property or charge off your account to a collection agency. Both will affect your credit report. As you are unable to pay the mortgage dues, you should contact your second mortgage lender and apply for a loan modification.
To djmoz,
If you want to buy a second home, you will have to use it as a collateral and get a mortgage on it. Moreover, lenders are generally not ready to give you a mortgage to buy a new property if you already have a mortgage.
As far as your first mortgage is concerned, you will be able to refinance the loan depending upon your financial situation and credit report. You should only refinance if you are planning to stay in the property for a long period of time.
I am looking into using the equity I have built up in my home to build a garage. The house appraised for $77,000 in Jan 2009. I owe $49,000 on the home. The garage will hopefully cost under $10,000 due to me doing most of the work. What is your advice on this situation. :wink: