Mortgage second » Home Equity Loans

Hybrid Home Equity Loans Changing the Face of Second Mortgages

admin — Mon, 29 Mar 2010 19:07:19 +0000

Applications for home equity loans and second mortgages recently hit a 15 year high. According to Freddie Mac, “88% of homeowners who refinance their homes in the 1st quarter got a mortgage at least 5% larger than their first loan.” Since this was the largest increase since 1990, and the Fed continues to increase key interest rates, it is my contention that the demand for cash and the ability to finance quickly is the greatest it has been since World War II.

“The reality is that some people still believe the interest rate are under 6%,”said John Allen from Laguna Beach, California. John continued, “If I need cash for home improvements..Why wouldn’t I just take out home equity loan since my first mortgage rate is under 5%.” John’s mentality mirrors many of my borrowers’ frames of mind of late. Consumers are much more educated than they used to be about financing and taking out second mortgages. First time homebuyers don’t hesitate to get subordinate financing to help them accomplish their goals. Some people like John just want to finance the construction for pool and spa, but most of my borrowers are focused on consolidating credit card debt so they can cut their expenses and have access to more money at the end of the month.

Some interesting home equity products have rolled out recently. Companies like BD Nationwide Mortgage and Ditech are offering larger 125% loans, and convertible equity credit lines. They are called convertible, because they start out as variable rate credit lines, but at any point you can convert portions of the line to a fixed rate loan, and still keep the unused portions of the line of credit open for revolving credit. These hybrid home equity loans are changing the face of second mortgage products and they offer powerful features that meet the needs of a typical family as well as the savvy real estate investor.

By: Lynda Nelms

Home Equity Loan Advice: Why Home Equity Rates Are Higher Than 1st Mortgage Interest Rates

admin — Sat, 27 Feb 2010 16:36:45 +0000

Mortgage refinancing can make good sense if you want to make improvements on the house, pay those college fees, or pay-down higher-interest loans. As property prices have gone up and up, homeowners often find they have more equity than they ever dreamed of when they first bought. Richard Syron, CEO and Chairman of the Federal Home Loan Mortgage Corporation — or ‘Freddie Mac’ — says “more than a dozen years of sustained growth in housing prices have turned many middle class homeowners into millionaires; put countless children through college; and made the family home the most valuable egg in the American nest”. Maybe we can’t all be millionaires but, even so, “for the typical family, home equity accounts for the bulk of their wealth,” agrees Frank Nothaft, chief economist at Freddie Mac.

It all looks good, so far. But now that you’ve started to look for that home equity loan — most likely a fixed-term second mortgage, or a line of credit — maybe you’re starting to wonder why home equity rates are generally higher than all those great first mortgage packages?
There are quite a few reasons. For a start, you’re comparing apples and oranges —they’re different breeds of loan, and the interest rates reflect the different features offered by each. But how, exactly, are those interest rates set? Frank Nothaft explains that “home equity loans are typically linked to the prime rate … many home equity loans have rates that are 1 percent or more above the prime rate” and, by comparison, “most 30-year first mortgages are typically below prime”. The interest rate for a typical home equity loan needs to take several factors into account: the risks to the lender, the duration of the loan, the flexibility offered to the borrower, and the amount of the loan in relation to the amount of equity available (referred to as the Loan to Value (LTV).

The first mortgage, of whatever kind, is just that — it’s the first lien on your property, and the first in line if you default on your loans. When you got your first mortgage you put your home up as collateral against the loan. If you can’t make the payments, the mortgage company can proceed with a collection action — in a worst-case scenario, you lose the house to pay off the loan. And, because it’s the primary loan, your first mortgage has priority in any collection action. Essentially, the mortgage company is confident that they’ll get their money back if you default. For a second mortgage, the situation’s different: whether it’s a conventional repayment mortgage or a line of credit (or any other kind of loan), it’s second in line if things go wrong. So that’s a bit more of a risk to the mortgage company, particularly if the value of your house depreciates, or you take out yet more loans.

And then there’s the time factor. The term, or duration, of a home equity loan is usually far less than that of a first mortgage. Most first mortgages are for a period of maybe 15, 20, or even 30 years. That’s because most people want to minimize their mortgage payments as much as possible, especially at the outset, and they’re in it for the long-haul. And, just think about it: while you’re making the payments, you’re paying interest, and you’re making the mortgage company money. You’re a good bet. That’s why, when it comes to first mortgages, companies compete with each other so aggressively to get your custom. And they pass that competition on to you, through lower interest rates.

A standard home equity loan is effectively a second mortgage, and can be a fixed or adjustable rate mortgage. The money is loaned in one lump sum, and payments are made over a pre-arranged duration — just like a first mortgage. But a home equity loan is typically for a short term, possibly only for a few years. Usually it’s for a specific purpose — home improvements, or paying of a debt — and the higher interest rate means most people prefer to pay it off as soon as they can, rather than mount up large amounts of interest. The mortgage company doesn’t have your custom for the long-haul, and it takes this into account when setting the interest rate.

Even so, this kind of mortgage can be far cheaper than the interest rates on credit cards or unsecured loans. As interest rates rise, pushed up by the Federal Reserve’s successive increases in the prime or ‘index’ rate, more and more borrowers are seeing the value of fixed-rate home equity options, in the 10-15 year range. Although these still have higher interest rates than first mortgages, homeowners have the best of both worlds: the comfort of knowing the rate won’t rise, and the ability to improve their quality of life by releasing the equity in their home.

With the other kind of home equity loan, the line of credit, you can draw cash whenever you want, up to your limit. When you pay money back, that credit is released again for you to use, immediately. In that sense it’s an “open account”, a bit like having a credit card, but with lower interest rates. This freedom to dip in and out of the loan can be a boon for the homeowner, who only pays interest on the amount owed, and nothing more — but it is more unpredictable, and less lucrative, for the mortgage company. So you pay that bit more for the flexibility of being able to use the loan as you wish, and that comes in the form of a higher interest rate.

But, given the ability to release your equity and use your wealth when and where you want, it can certainly pay to refinance. Don Taylor, of Bankrate.com, agrees, saying that a home equity loan, or a home equity line of credit (HELOC) can “allow you to restructure your debts or finance something that’s important to you,” and adds that both kinds of loan typically have much lower closing costs than a first mortgage.

By: Katharine Norman

State Fee Limits for Second Mortgages in California

admin — Thu, 14 Jan 2010 10:48:49 +0000

Everywhere you go, advocacy groups are urging stricter laws on non-conforming 2nd mortgages and home equity loans. Sub-prime mortgages are likely to be more costly than “A -paper” loans, but they are intended for borrowers who pose a greater risk to lenders. In most cases they are considered non-conforming because of the lack of credit or past credit problems.

California’s new laws, AB 489 and AB 344, became effective July 1, 2002. They apply to a mortgage or deed of trust with a loan balance of no more than $250,000. The protections provided by the laws are triggered if the annual percentage rate of the loan is more than eight percentage points over the yield on Treasury securities, or if the total points and fees payable by the consumer exceed six percent of the total loan amount. Thus, there is a 5.99% max in fees. (i.e., $35,000 second mortgage in CA is restricted to 5.99% of loan amount = $2,096 for APR affecting fees. Maximum APR for a 15 year 2nd mortgage in August in CA is 13.10%, and for the rest of the nation its 15.07%.

What is happening is that people in California are being rejected for 125% second mortgages and sub-prime home equity loans because the State of California thinks that they can’t make financial decisions on their own. And, some groups continue to feel the need for legislation further tightening the provisions of AB 489 which would make it even more difficult for California homeowners to use their home equity to secure loans.

If California homeowners want to consolidate credit card debt that they are paying 20% a month for, they should be able to consolidate the debt into a second mortgage. Interest rates are driven by market conditions, and credit risks determined by the lenders. CA should follow suit with the rest of the nation.

Excessive anti-predatory lending laws can hurt legitimate lenders and the consumers they serve. For example, sub-prime loans do help people with poor FICO scores by extending debt consolidation refinancing and second mortgage loans to pay off high-interest debts. Also, sub-prime loans are legitimately extended to borrowers with good credit who are self-employed or who have unpredictable incomes.

By: Maria Ny

Fixed Rate Home Equity Loan Versus Adjustable HELOC: Comparing 2nd Mortgage Loans

admin — Sat, 19 Dec 2009 18:07:23 +0000

Many people think of a second mortgage as a fixed interest, lump sum loan. However, that is only one form of a second mortgage. A second mortgage is actually ANY secondary lien on your home–secured loan with your home pledged as collateral. Second mortgages are typically categorized as fixed mortgage rate home equity installment loans (HELs), also known as home equity loans, and home equity lines of credit (HELOCs) which are adjustable rate mortgages.

The Federal Reserve states that the home equity line of credit annual percentage rate (APR) is a variable rate loan based solely on a publicly available index (such as the prime rate published in the Wall Street Journal or a U.S. Treasury bill rate). The APR does not include points or other finance charges. The monthly payment amount will adjust as your loan balance and interest rate changes. Loan terms can be anywhere from 15 to 30 years.

HELOCs have a draw period, typically occurring in the first 10-15 years, with the remaining term on the loan referred to as the repayment period. During the draw period, you can draw out money on a revolving basis similar to a credit card without applying for a new loan, as long as the amount does not exceed the total amount of the original HELOC. During the repayment period you may be allowed to renew the credit line. If your plan does not allow renewals, you will not be able to borrow additional money once the draw period ends. Interest is paid only on the amount of equity you use.

A Home Equity Installment Loan (HEL) is a fixed mortgage rate loan, which means the annual percentage rate (APR) and monthly payment will stay the same for the life of your loan. The APR for a HEL takes into account the interest rate charged plus points and other finance charges. Loan terms can be anywhere from 5 to 30 years, but are typically 15 to 20 years. Unlike a HELOC, you get a lump sum for which you immediately start paying principal and interest. If you decide later that you need additional funds, mortgage refinancing or getting an additional loan with additional closing costs are your only options.

Which type of loan you choose depends on your financial needs. A HELOC may be best if you have a recurring need for money (e.g., home improvements or a home repair project that has anticipated additional expenses). The security of a fixed-rate 2nd mortgage will probably provide much-needed relief for a large one-time expense (e.g., debt consolidation).

By: Maria Ny

Why Second Mortgage Rates Are Higher for Home Equity Loans than 1st Mortgages

admin — Sun, 22 Nov 2009 23:30:45 +0000

Home equity is the difference between what you owe on your mortgage and the fair market value of your home. Cashing out on home equity for debt consolidation is continuing to gain popularity. The typical way to cash out on home equity is to either refinance an existing first mortgage or take out a second mortgage.

Many people wonder why the interest rates for second mortgages are higher than those for first mortgages. The reason for this is a second mortgage is a subordinate loan secured by the same property as the first mortgage. Thus, if the mortgage isn’t paid and there is a foreclosure on the property, the first lender is paid off before the second lender. As a result, second mortgages entail more risk for the lender. To offset the risk, lenders charge higher interest rates for second mortgages than for first mortgages.

According to BankRate, second mortgage and home equity lines of credit have become increasingly common since the mid-1980s as property values have soared and homeowners have learned about managing personal debt. Among the reasons for this surge in popularity: attractive interest rates and tax deductibility. Many times, home owners can deduct up to 100% of the interest they pay on mortgage loans off their taxes.

If you need to draw equity from your home and the rates on your first home are lower than the current rates, it will probably be cheaper to get a second mortgage even though interest rates are higher. If you have a specific purpose for the loan that requires a specific amount of money, a home equity loan, also known as a home equity installment loan (HEIL), may be your best bet. Home equity lines of credit (HELOCs) are useful for those who have an occasional or on-going need for money because interest is only charged on the amount of equity used.

Compare the annual percentage rate (APR), the cost of credit on a yearly basis, when shopping for a second mortgage. Unlike home equity loans that include the total credit costs for the loan, the advertised APR for home equity credit lines is based on interest alone. For a true comparison of credit costs, compare other charges, such as points and closing costs, which will add to the cost of your loan.

By: Maria Ny

Second Mortgage Loans Vs Home Equity Loans

admin — Wed, 18 Nov 2009 11:02:04 +0000

It’s not surprising that some homeowners confuse the terms “second mortgage” and “home equity loan.” After all, a second mortgage is a type of home equity loan. But more often than not, home equity loan is used to describe a home equity line of credit, or HELOC. If you want to take advantage of the equity that you have built up in your home, you will need to decide if a HELOC or a true second mortgage is best for you.

Make a list of what you want to know, what you need to know, and what you already know about this subject.

Before agreeing which might be better for your purposes, let’s look at some of the basics of each. A second mortgage pays out a permanent sum of money to be reclaimed on a set schedule, like your opening mortgage. Different refinancing, the second mortgage does not supplant the first mortgage. Moment mortgages are typically 15- to 30-year loans with a permanent ratio of profit. Like the opening loan, the ratio of profit and points (if any) will be based on your credit chronicle, the estimate of the home, and the flow profit ratio. While the profit ratio on a second mortgage may be a little advanced, the fees are normally poorer. Should You Pay Points?

A HELOC, however, is parallel to a credit license, and it may even involve a credit license to make purchases. Like credit licenses, profit is emotional, and the quantity you can sponge is based on your creditworthiness.

To shape the perimeter of your HELOC, lenders will look at the appraised appraise of your home and begin their calculations at 75 percent of that appraise. They then withhold the outstanding tally allocated on the mortgage. If your home was appraised at $200,000, the lender would typically look at a greatest of $150,000 or 75 percent. If you had salaried off $100,000 of your $180,000 loan, the lender would then withhold the lasting $80,000, which would mean you would have a greatest of $70,000 offered on a HELOC if you had a very good credit chronicle. Learn how to Evaluate Your Creditworthiness.

As we take a closer look, keep in mind all of the useful and important information that we have learned so far.

Your flow fiscal desires will help shape which type of loan is right for you. If you need money for a one-time price, such as edifice a new deck or paying for a wedding, you would doubtless opt for the permanent-ratio second mortgage.

But if you forecast a habitual need for further money, such as teaching payments, you may favor a HELOC. A line of credit allows you to sponge when you need the money and, if you pay back the quantities you sponge rapidly, you can store money over a second mortgage. You also need to respect your expenses routine. If having another credit license in your wallet would tempt you to waste more often, then you are not a good contender for a HELOC.

Once you make an opening determination about which loan might be right for you, you will need to argue the niceties with your lender. While second mortgages typically operation in the same mode as your opening mortgage, ranks of credit are different. Because they aspect monthly payments, you will need to analysis the keen typeset charily.

There is no famine of lenders and offers for loans and ranks of credit. Deem your desires, then store around for a lender you can faith.

If you have found our database of information on this subject useful, read some of our other topics as well.

By: Amy Shan