A generation ago, home equity loans were often made by shady characters to the financially distressed. Today, second mortgages are a legitimate financial tool that can be of benefit to homeowners. They come in all shapes and sizes to meet the needs of various homeowners. Let’s examine their characteristics -- their pros and cons.
Second mortgages are increasingly popular today. Let’s be honest. Almost all of the A-paper borrowers in the country got a really cheap loan in 2002 or 2003, like 4% or 5% loans. If they need money for some good purpose, they are not going to want to refinance at current rates. It’s better to get a second mortgage.
There are two main types of seconds. The first is the Home Equity Loan and the other is the popular Home Equity Line of Credit, aka the HELOC, or “equityline” loan.
The typical home equity loan is distinguished from its popular counterpart, the equityline loan, in that the loan is for a fixed amount and the payment schedule amortizes the loan over a pre-set period of time. For example, if you borrow $50,000 at 7 percent for 15 years, the payment will be $449.41 per month and the loan will be paid off slowly over 15 years. Most lenders also offer a “30 due in 15” where the balance is amortized over 30 years. It has a balloon at the end of 15 years if you haven’t paid it off by then – hence the emphasis “due in 15.”
What makes home equity loans enticing and perhaps the most suitable is when their purpose is to finance a specific project, like re-modeling. These loans are widely available and you can get up to 90 percent of your home’s current value. But they are pricier. If your home is worth $500,000, you can borrow up to $450,000, so if your current mortgage is $300,000, you can borrow another $150,000.
You can also borrow what you need with a home improvement loan, one taken out to finance improvements to the property, like adding a recreation room or swimming pool or modernizing the kitchen. Such improvements add value to a property, so the lender will do an appraisal based upon the value after the improvement is completed and grant a loan on that increased value. I should warn you that the paperwork required on this kind of loan can be horrendous, but if you can’t get the loan amount you need based upon the current value of the home, this may be a good solution.
The negative of a home equity loan is that, once in place, it cannot be increased should some other need arise in the future. Let’s say you have such a loan and another need arises that requires a chunk of money. You can go get another home equity loan -- unless you made the mistake of getting your first one with a prepayment penalty.
A positive is that the loan is guaranteed to disappear over a period of time. Also, you do not have the temptation of drawing on it for some fleeting purpose as you can with an equityline loan.
As with HELOCs, discussed next, the market for these loans is highly competitive and there are precious few differences between them. That means the benefits of being a shrewd shopper are fewer as there are just not enough different options to choose from. The first stop should be to the loan officer or broker who helped you buy your home. All of us have numerous sources for these loans. Local banks are okay too, and existing customers will receive favorable treatment. Credit unions usually charge lower fees but you have to be a member. Finally, there are many Internet sources.
WARNING: Avoid prepayment penalties that lenders love to slip in when you aren’t looking.
While the interest paid on a home equity loan is tax deductible, remember that it is of benefit only to the extent that all of your deductions exceed the standard deduction available to all taxpayers. Also, there are some limits on deductibility of interest on loans over $100,000. Consult your tax advisor to see how the rules apply to you.
WARNING: I would advise against getting one of the heavily advertised 125 percent loans where the lender will lend you more than the equity in your home. Technically, they are not equity loans but “equity-destroying” loans.
http://www.credit.com/credit_information/mortgages/Making-Sense-of-Home-Equity-Loans.jsp
Thursday, November 15, 2007
Home Equity: How to Build it, How to Use it
When homeowners purchase their first home, their equity is small. The only equity may be just the initial down payment, which is perhaps only 5% or 10% of the value. Or it maybe nothing, as is the case with people who bought with “no money down” in the recent days of profligate lending.
During the next 30 or so years, equity increases as a result of appreciation in property value and by slowly paying down the mortgage balance. A worthy goal for many people is to maximize their home equity by the time they retire. In fact, for many people, building equity in their home is a simple and relatively painless way to increase their net worth.
Indeed, for those who have modest retirement benefits, building substantial equity holds the key to a successful retirement. This series will focus on developing strategies to assure, first, that you maximize your equity in the manner most suitable for your situation, and second, to consider how you can use equity to further other purposes you may have.
Building Equity after Buying
Whatever equity you started out with, it is important to build it quickly. At the current date, mid-2007, we have come to the end of a period of spectacular increases in real estate values. Lots of homeowners were beneficiaries of this. Today, you can't count on that and equity may have to be built the old fashioned way -- by paying for it!
At some point in time you may want to sell your home and buy another one. It will be important to be able to take as much equity as you can with you to your new home. This isn't easy when you start out having to pay a 6% real estate commission. Don't assume that you can sell without a broker. You may get lucky, but maybe not!
If you bought your home with no money down, you have to scratch up 6% equity just to get out with no money. With normal amortization on a 30 year loan, the mortgage balance won't have been paid down to 94% of its original value until after 4 years have passed. For those who got the popular Interest-Only loans, they never will get there!
Bottom line: You need to manage your mortgage debt by paying it down so as to meet your objective. I know that all borrowers stretch in making mortgage payments, particularly on their first home, and here I am talking about increasing the monthly payment. But that's reality and you need to deal with it. If you get lucky, we'll see renewed appreciation and you'll get a little help.
There are many calculators on the Internet that can help you figure out a plan to meet your objectives. Try the ones at http://www.mtgprofessor.com/calculators.htm
Building Equity for Retirement
Your Sure Fire Happy Retirement Plan is to pay off your mortgage the month you retire. Your income will drop when you retire, but when you also eliminate the largest expense item in the budget, retirement can be a joy.
However, one of the funny things about time is how quickly it passes. All of a sudden, you're 60 years old and you “forgot” to make those extra principal payments you talked about and you still have a hefty mortgage balance. Owning your home free-and-clear, as the expression goes, sound pretty good. With a plan, you're likely to achieve your goal, so let's talk about goals and planning.
To achieve this goal, you must start years earlier. You've seen the examples that show the advantage of starting to contribute to your 401(k) in your twenties rather than later in your career. The mortgage payoff plan is no different. Ideally, the plan should be implemented when you are just entering your fifties, if not before.
Your income is close to its peak and your expenses are down after launching your kids. You're comfortable with your monthly mortgage payment but you now have more disposable income. That's the time to increase your payment to a level that will have the loan paid off at a specific time in the future. Let's work through an example.
Say you and your spouse are 47 years old and you want to have your mortgage paid off when you are 63 years old, 16 years into the future. Let's assume that you got a 6% $250,000 30-year loan seven years ago. The payment is $1,499 per month. The current balance is $224,088 but if you don't do something different, it wouldn't be paid off until you were 70. By increasing the payment to $1,818 per month, you can reduce the length of the loan to 16 years. In addition, because you've paid the loan down faster, you save a total $64,500 in interest over that 16 year period. All that went to paying down the principal faster.
Sometimes you can hasten this process by refinancing. In the next article in this series, we'll explore the costs and benefits of refinancing and discuss how you can decide if it makes sense for you.
http://www.credit.com/credit_information/mortgages/Home-Equity-How-to-Build-it-How-to-Use-it.jsp
During the next 30 or so years, equity increases as a result of appreciation in property value and by slowly paying down the mortgage balance. A worthy goal for many people is to maximize their home equity by the time they retire. In fact, for many people, building equity in their home is a simple and relatively painless way to increase their net worth.
Indeed, for those who have modest retirement benefits, building substantial equity holds the key to a successful retirement. This series will focus on developing strategies to assure, first, that you maximize your equity in the manner most suitable for your situation, and second, to consider how you can use equity to further other purposes you may have.
Building Equity after Buying
Whatever equity you started out with, it is important to build it quickly. At the current date, mid-2007, we have come to the end of a period of spectacular increases in real estate values. Lots of homeowners were beneficiaries of this. Today, you can't count on that and equity may have to be built the old fashioned way -- by paying for it!
At some point in time you may want to sell your home and buy another one. It will be important to be able to take as much equity as you can with you to your new home. This isn't easy when you start out having to pay a 6% real estate commission. Don't assume that you can sell without a broker. You may get lucky, but maybe not!
If you bought your home with no money down, you have to scratch up 6% equity just to get out with no money. With normal amortization on a 30 year loan, the mortgage balance won't have been paid down to 94% of its original value until after 4 years have passed. For those who got the popular Interest-Only loans, they never will get there!
Bottom line: You need to manage your mortgage debt by paying it down so as to meet your objective. I know that all borrowers stretch in making mortgage payments, particularly on their first home, and here I am talking about increasing the monthly payment. But that's reality and you need to deal with it. If you get lucky, we'll see renewed appreciation and you'll get a little help.
There are many calculators on the Internet that can help you figure out a plan to meet your objectives. Try the ones at http://www.mtgprofessor.com/calculators.htm
Building Equity for Retirement
Your Sure Fire Happy Retirement Plan is to pay off your mortgage the month you retire. Your income will drop when you retire, but when you also eliminate the largest expense item in the budget, retirement can be a joy.
However, one of the funny things about time is how quickly it passes. All of a sudden, you're 60 years old and you “forgot” to make those extra principal payments you talked about and you still have a hefty mortgage balance. Owning your home free-and-clear, as the expression goes, sound pretty good. With a plan, you're likely to achieve your goal, so let's talk about goals and planning.
To achieve this goal, you must start years earlier. You've seen the examples that show the advantage of starting to contribute to your 401(k) in your twenties rather than later in your career. The mortgage payoff plan is no different. Ideally, the plan should be implemented when you are just entering your fifties, if not before.
Your income is close to its peak and your expenses are down after launching your kids. You're comfortable with your monthly mortgage payment but you now have more disposable income. That's the time to increase your payment to a level that will have the loan paid off at a specific time in the future. Let's work through an example.
Say you and your spouse are 47 years old and you want to have your mortgage paid off when you are 63 years old, 16 years into the future. Let's assume that you got a 6% $250,000 30-year loan seven years ago. The payment is $1,499 per month. The current balance is $224,088 but if you don't do something different, it wouldn't be paid off until you were 70. By increasing the payment to $1,818 per month, you can reduce the length of the loan to 16 years. In addition, because you've paid the loan down faster, you save a total $64,500 in interest over that 16 year period. All that went to paying down the principal faster.
Sometimes you can hasten this process by refinancing. In the next article in this series, we'll explore the costs and benefits of refinancing and discuss how you can decide if it makes sense for you.
http://www.credit.com/credit_information/mortgages/Home-Equity-How-to-Build-it-How-to-Use-it.jsp
Home Buying Questions - Am I Ready to Buy?
For obvious reasons, this should be the first home buying question you ask yourself. After all, if you're not ready to buy a home, there's no point in asking all the other home buying questions.
This is a question that only the home buyer (or potential home buyer) can answer. Buying a home is one of the biggest financial decisions you will ever make, so you need to weigh the facts carefully and be honest with yourself.
Helpful Resources
Here are some resources to help you answer this all-important home buying question, "Am I ready to buy a home?"
* Are You Ready to Buy a Home?
* How Much Can You Afford?
* Buying vs. Renting Calculator
* The Buying vs. Renting Decision
http://www.homebuyinginstitute.com/homebuyingtips/labels/Home%20buying%20questions.html
This is a question that only the home buyer (or potential home buyer) can answer. Buying a home is one of the biggest financial decisions you will ever make, so you need to weigh the facts carefully and be honest with yourself.
Helpful Resources
Here are some resources to help you answer this all-important home buying question, "Am I ready to buy a home?"
* Are You Ready to Buy a Home?
* How Much Can You Afford?
* Buying vs. Renting Calculator
* The Buying vs. Renting Decision
http://www.homebuyinginstitute.com/homebuyingtips/labels/Home%20buying%20questions.html
Home Buying Questions - Choosing a Neighborhood
Continuing our series on home buying Q&A, we come to another frequently asked question among home buyers: "How do I choose a neighborhood?"
This is a great home buying question to ask, because it shows you're thinking the right way about real estate. When you buy a home, you are also buying into the neighborhood in which the home resides. You are also buying into the school system, property tax situation, and other factors that affect the value of your home.
There's also the more human aspects of choosing a neighborhood. Obviously, you want to choose a neighborhood that you'll enjoy coming home to every day ... a neighborhood where other home owners care about the appearance of their homes, and the appearance of the neighborhood as a whole.
In other words, you want to choose a neighborhood that complements your home, as opposed to detracting from it.
Here are some resources to help you choose the right neighborhood before buying a home.
* Neighborhood Scout
* Yahoo Neighborhood Reports
* Helpful article on-site (scroll down to "location, location, location")
* Choosing the right neighborhood (About.com)
http://www.homebuyinginstitute.com/homebuyingtips/labels/Home%20buying%20questions.html
This is a great home buying question to ask, because it shows you're thinking the right way about real estate. When you buy a home, you are also buying into the neighborhood in which the home resides. You are also buying into the school system, property tax situation, and other factors that affect the value of your home.
There's also the more human aspects of choosing a neighborhood. Obviously, you want to choose a neighborhood that you'll enjoy coming home to every day ... a neighborhood where other home owners care about the appearance of their homes, and the appearance of the neighborhood as a whole.
In other words, you want to choose a neighborhood that complements your home, as opposed to detracting from it.
Here are some resources to help you choose the right neighborhood before buying a home.
* Neighborhood Scout
* Yahoo Neighborhood Reports
* Helpful article on-site (scroll down to "location, location, location")
* Choosing the right neighborhood (About.com)
http://www.homebuyinginstitute.com/homebuyingtips/labels/Home%20buying%20questions.html
Home Buying Challenges Outlined in Report
Industry Survey Reports on New Challenges Facing Home Buyers
ARLINGTON, Va., Nov. 9 /PRNewswire-USNewswire/ -- Recently media attention has been heavily focused on the difficulties home sellers face with the current glut of inventory and the tightening of the sub-prime mortgage market. However, according to a Fall member survey and report from the National Association of Exclusive Buyer Agents (www.naeba.org), home buyers are also facing new challenges. The report, titled "Under-Reported Home Buying Issues: How home buyers can overcome the latest buying challenges" contains survey results, case histories, and strategies buyers can use to best meet these challenges. The report is available as a free download at the association Web site: http://www.naeba.org/challenges.
The report highlights many important issues for buyers, but the rising use of buyer agent bonuses and difficulties when buying foreclosed homes were two of the most revealing.
"One of the top issues for buyers, in what industry insiders refer to as 'buyer agent bribes,' is when a seller offers a bonus to the buyer agent to put a full price contract together on their home. A buyer's agent should be loyal only to the buyer and sometimes buyers don't find out about these bonuses until the deal is done," reported Jon Boyd, President of the NAEBA.
The report also includes recommendations buyers should keep in mind when considering a foreclosed property including tactics on contract addenda and contract timing. "A challenge that scored high in the survey was the difficulty associated with buying foreclosures. Awareness of the five tips we offer in the report can make the process of evaluating and purchasing a foreclosure a lot less frustrating," Boyd said.
The National Association of Exclusive Buyer Agents was founded in 1995 to help consumers become educated home buyers. NAEBA is a nonprofit organization whose purpose is to be the "champions of real estate buyers' rights and representation." NAEBA offers industry standard certifications, ongoing education, client referral services, technology and information sharing. The NAEBA Code of Ethics pledges undivided loyalty to real estate buyers only. More information about NAEBA can be found at www.naeba.org.
Website: http://www.naeba.org/
Note: One of the areas of difficulty mentioned in this press release was the act of buying a foreclosed home. You can learn more about buying foreclosed homes on our website.
ARLINGTON, Va., Nov. 9 /PRNewswire-USNewswire/ -- Recently media attention has been heavily focused on the difficulties home sellers face with the current glut of inventory and the tightening of the sub-prime mortgage market. However, according to a Fall member survey and report from the National Association of Exclusive Buyer Agents (www.naeba.org), home buyers are also facing new challenges. The report, titled "Under-Reported Home Buying Issues: How home buyers can overcome the latest buying challenges" contains survey results, case histories, and strategies buyers can use to best meet these challenges. The report is available as a free download at the association Web site: http://www.naeba.org/challenges.
The report highlights many important issues for buyers, but the rising use of buyer agent bonuses and difficulties when buying foreclosed homes were two of the most revealing.
"One of the top issues for buyers, in what industry insiders refer to as 'buyer agent bribes,' is when a seller offers a bonus to the buyer agent to put a full price contract together on their home. A buyer's agent should be loyal only to the buyer and sometimes buyers don't find out about these bonuses until the deal is done," reported Jon Boyd, President of the NAEBA.
The report also includes recommendations buyers should keep in mind when considering a foreclosed property including tactics on contract addenda and contract timing. "A challenge that scored high in the survey was the difficulty associated with buying foreclosures. Awareness of the five tips we offer in the report can make the process of evaluating and purchasing a foreclosure a lot less frustrating," Boyd said.
The National Association of Exclusive Buyer Agents was founded in 1995 to help consumers become educated home buyers. NAEBA is a nonprofit organization whose purpose is to be the "champions of real estate buyers' rights and representation." NAEBA offers industry standard certifications, ongoing education, client referral services, technology and information sharing. The NAEBA Code of Ethics pledges undivided loyalty to real estate buyers only. More information about NAEBA can be found at www.naeba.org.
Website: http://www.naeba.org/
Note: One of the areas of difficulty mentioned in this press release was the act of buying a foreclosed home. You can learn more about buying foreclosed homes on our website.
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