Commercial real estate investors often ask which is the more appropriate loan for their situation, the Commercial Equity Line of Credit or the Commercial Fixed Rate Second. Both of these loans sit in second lien position behind any existing first commercial mortgage, enabling investors to unlock equity and use those proceeds for other projects. Common uses include rehab capital or down stroke cash for new property acquisitions.

The advice on which is the better loan program, depends on how the investor is planning on using the cash proceeds of the loan. We often caution investors to be realistic and thorough about predicting future property value as that has a major affect on potential loan options.

For example, if the investor is purchasing a stabilized property and simply wants to pull cash out of an existing property to cover the down payment/closing costs it is often best to go with the Commercial Fixed Rate Second. The primary reason is a result of two factors 1. The subject property is stabilized – therefore has little room for rapid appreciation and 2. Bank restriction on cash out refinances. As of this writing, 95% of all funding sources will not go beyond 75% – 80% loan to value on commercial cash out refinances.

Due to these two factors it might be 10 years or more before the value of the subject property catches up and puts the investor in the position to pull enough cash/equity out of the new property to pay off the second position loan. Said in another way, most investors do not want the risk of having a floating rate line of credit for length of time.

Just the opposite advice would normally be given to investors purchasing properties that are unstabilized and have solid potential for increased value. So, the recommendation is to go with the Commercial Equity Line. Renovate the property, increase occupancy, increase gross income, etc. which in turn, increases the value of the subject property. Than refinance the first mortgage on the new property via a cash out refinance. Use the proceeds to pay off both the balance on the Equity Line and the balance on the first mortgage of the new property.

Why bother? Why not just get a Fixed Rate Second and not worry about having to refinance the debt on the line? or have to worry about the rate increasing on the line? There are typically a couple of good reasons. 1. The rate of the Fixed Rate Second position loan is normally 50 bps to 150 bps higher than on a typical first position loan. By getting an overall lower rate, the investor’s portfolio cash flow should increase. 2. By paying of the balance on the Commercial Equity Line the investor now has access again to capital on the line to begin another project.

Of course every situation is different and requires tailored strategies to put the investor in the best position possible. The idea is to just plan ahead and compensate for both the investors comfort zone as well as the restriction that the investor faces when dealing with funding sources.

By: Jeff S Rauth

A second mortgage, or a home equity loan, is a good option if you’ve got climbing debt and some equity built up in your home. Taking out a home equity loan or a home equity line of credit may be a viable solution for you, but only if you find the right second mortgage interest rate.

You can use the funds from your second mortgage or line or credit in order to pay off debt, do home renovations or consolidate your bills. However, if you’re using it to pay off debt and you don’t do anything to adjust the way that you have been spending money then you’ll end up overspent again in just a few years. Don’t think of a second mortgage as a band-aid to a bad spending habit. Take out the second mortgage but also start using a family budget and control frivolous spending.

That being said, getting a good second mortgage interest rate is definitely possible even in today’s market where interest rates are starting to climb. Even with the increases, they are still lower than they were ten to fifteen years ago. If you have an older home, it’s still a good time to take advantage of the equity built up in your home.

Getting a good second mortgage interest rate is easier than applying for your first mortgage. With second mortgages, there isn’t quite as much paperwork, or as much time to wait for approval. Since you have the collateral of your home you represent a lower risk to the lending institution.

There are two types of second mortgages to choose from: the second mortgage loan and the second mortgage line of credit. Your second mortgage loan acts a lot like your first mortgage. You receive a lump sum of money. The second mortgage has lower closing costs than the first, but you are also paying a higher interest rate with the second mortgage.

The second mortgage line of credit acts like a credit card with a standard credit limit, but a line of credit has a variable rate. The interest will change depending on the month, which can be really great when interest rates are low like they have been lately, but difficult if they are high. You can use your line of credit as long as you have funds, but there is a cap to how much you can spend. At a certain period of time, 5, 10 or 20 years in the future, you won’t be able to borrow on the line of credit any longer and you’ll have to start making standard monthly payments. Up until that point, you can pay off as much or as little as you’d like to each month.

Just like with your first mortgage, you’ll want to shop around to get the best second mortgage interest rate. Determine whether a loan or line of credit would be best for you, and then take steps to improve your overall financial picture by using the equity in your home.

By: Josh Spaulding

You need to use your house as equity to get some extra cash. However, you don’t know whether you should take out a second mortgage or a home equity loan. What’s the difference anyway? Wouldn’t Utah home equity loans and Utah home mortgages be the same over the long run? Well, not really. Consider the differences before making your decision and realize that mortgage planning is important.

First of all, the wording is difficult to understand. But, you must understand the difference in order to make the right decision. A second mortgage is simply another lien on your property. A second mortgage is very similar to the first mortgage, just that it comes second. It is likely to be an adjustable rate or fixed rate loan just like the first mortgage.

Then there are home equity loans. These loans appeared in the 1980s as a second mortgage that was a line of credit open for the individual to “borrow” from as needed. The loans were called home equity loans and they allowed the borrower to take what was needed on an ongoing basis up to a certain limit. The difference between the two has now been discussed, but which one is the best one for you?

If you are trying to decide whether you need a second mortgage or a home equity line of credit you simply need to answer a couple of questions. First of all, what do you need the money for? If you need the money for a big repair project on the house or some other situation where you need a large sum of money in the exact moment then a second mortgage is a good option. But, if you need money over time, say to pay for college, then a home equity line of credit is the better option. You really need to determine your needs and what is available to you before making a decision. Once you have all of the information you will be ready to choose the best option for you.

Remember that when it comes to mortgage planning you can rely on a banker or someone else to guide you. But, you should be informed and educated on the options and what you are able to chose. Not to mention how it will affect you. When you have this information you will make better financial choices. So, do your research, learn the difference between the two, and then go ahead and make the best decision for you.

By: Natalie Aranda