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Get a Second Mortgage While the Market is Hot

12 March 2016 No Comment

canstockphoto24693245Depending when your home was purchased, you have no doubt seen the ups and downs on the housing market over the past ten years.  Some bought high and saw property values plummet, now finally seeing a little equity as the existing mortgage balanced continues to be paid down and home values have increased.  Others may have bought on the low end and gained equity, as demands for home purchases continue to climb as the supply decreases.  The number of foreclosures has gone down drastically as the need to walk away has diminished, now not feeling the need to walk away is the only financial savior, but also through more strict penalties, not seeing one spouse walk away from their current home while the other purchases a new home.  The economy has picked up and gone are the interest-only, buying more of a home than you can afford.  As there is now equity in your home, you may be looking to take cash out to make home improvements, pay off credit card debt, or even pay for a wedding, and what better time than now while the market is still on the rise.

A second mortgage is used against equity in your house in addition to the first mortgage.  For example, if you owe $125,000 on your first mortgage, the home is worth $200,000, there would be $75,000 in equity to draw from (although do not expect to be able to use all of that equity, as lenders typically now will not approve up to 100% loan-to-value for good reason, so I would expect a cap around 80%).  There are two types to choose from: first, a home equity line of credit, or HELOC, which is like a credit card in which you have an available line of credit to use when you need it, does not have to be all used at once.  Second, a fixed rate home equity line of credit, or FRHEL, where you receive a lump sum amount of money to use.  The HELOC is a variable-rate that can change, where the FRHEL’s rate is fixed, having a set schedule of payments.

There are plenty of positives to taking out either a HELOC or FRHEL.  You have cash available to you at lower interest rates, often in half compared to what an unsecured loan would provide, depending on credit history and current interest rates.  Much like the first mortgage you currently have, the interest is tax deductible, the same cannot be said for using a credit card or personal loan, and since homes typically now increase in value, you should not be handcuffed by using your home’s equity as it will continue to grow.  A potential downside to taking out a second is the possibility of taking out too much, tempted to borrow the max, using for extra spending.  Keep in mind it has to be paid back, so if you need to move, home values decrease, or interest rates rise, you could be stuck.

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