If you are looking for ways to find capital, the solution may be right under your roof. Subsequently, if you own your property and have equity, you may be able to qualify for a loan. Many of the guidelines have changed over the years, but pulling equity out of a property is still a real option in the right situation. Like every other loan, taking out equity starts with having a strong credit score. Not only that, but your home needs to have established equity in the first place. As long as these factors are in place, lenders will consider a second mortgage.
Home equity loans are starting to make a comeback after years away from the market. When the mortgage collapse hit, one of the first things many lenders did was to call any existing home equity lines. They didn’t want borrowers pulling out money without the intent or the means of paying the loan back. Since they are in second lien position, they know that it is difficult to get full value if the house is foreclosed on. Over the past few months, as property values have increased, there has been more demand for second mortgages than over the past years. Whether or not this is a product for you depends on a few different factors.
The first thing to understand about second mortgages is that there are a few different options. You can opt for either a home equity line of credit or a home equity loan. A home equity line of credit is similar to that of a credit card. You receive a line for the predetermined amount and will only pay back what you use. If you open up a line for $50,000 to use to cover some rehab costs on a property, but only use $15,000 of it, you will only have to repay that amount. This offers flexibility and the option of taking money out as you please.
However,the rate is adjustable on a home equity line of credit. Most of these lines of credit, or helocs as they have been referred to, will offer a ten year interest only period with the remaining balance paid back with principal over the next ten years. This will keep the monthly payments to a minimum level in the first half of the loan. When the principal kicks in, the new payment can produce quite a shock. If you are not adequately set for these payments, they could end up leading to foreclosure or forcing you to pull funds from different areas. As noted, the payment is not fixed and is based off of a designated index that can change from month to month. There has not been a great amount of increase over the past five years, but if the economy perks up and interest rates rise, the rates on lines of credit will rise in accordance.
If you want to know exactly what you will be paying every month for the next ten to twenty years, you would go with a home equity loan. The rates for a fixed rate loan will be higher than on a line, but the payment is much more secure. You will know, with certainty, what you will be paying, regardless of what the market is doing. The downside is that you will repay the entire amount of your loan, whether you use it immediately or not. There is also a natural temptation to lean on this money because you will receive a check immediately at closing. While this is a safer alternative, it may not be the best if you are using the funds on a specific property that you intend to sell or pay off in the short term.
As is the case with every loan you consider, you need to know exactly what you want out of the transaction. Pulling out equity can be the least expensive way to access capital, but it does come with certain negatives. For starters, you will have a lien and a loan payment due every month. Even though the repayment amount may be the best option, it is still a mortgage on title, regardless of the size of the loan. If you are delinquent on a payment, it will count just as much as your first mortgage payment. It will also dip into your equity: when you decide to sell, you are taking your cash presently in the form of a line of credit, as opposed to whenever you sell.
If you can use this money to grow your business or secure more deals, the benefits outweigh the negatives. The idea behind a second mortgages is for business purposes or to create value in a property. With prime rates where they are, a second mortgage is currently your best possible option for getting money. That can certainly change over time, but if you use the money correctly and pay back some principal when you have it, a second mortgage may be the best option.
Before you apply for any loan, you should discuss all of your options with your lender or broker. Some lenders have no closing cost and streamlined application options that could make a new second loan very attractive. Know what you are getting into and what you would use any funds for, but if you have equity, a second loan could be the right option for you.
