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Home
Equity |
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What
is the difference between a traditional second mortgage
and a home equity line of credit? |
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Both traditional seconds as well as home
equity lines of credit are technically considered second
mortgages. With a long-established second mortgage, the
rate is typically fixed and all funds are paid out at
closing. The term of the mortgage could be anywhere from
15 to 30 years. With a Home Equity line of credit, as
the name implies, the funds are drawn from a credit line
account as needed and not paid out in a lump sum at closing.
The rate on the credit line is naturally an adjustable
(usually tied to the prime rate index) and the term can
be somewhere from 15 to 30 years. Home equity lines have
a draw period, typically occurring in the first 10-15
years, with the lasting term on the loan referred to as
the repayment period |
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Is
it better to refinance my first mortgage to take cash
out rather than getting a second mortgage on my property?
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First determine how competitive your existing
first mortgage rate is relative to where current interest
rates are. Also, evaluate how many years you have paid
into your existing first mortgage. For example, if you
have been making payments for only several years and today's
market rates are close to where the rate on your existing
first mortgage is, then you may want to consider refinancing
your first. Conversely, if the rate on your accessible
first mortgage is significantly lower than that of current
market rates and if you have been making payments on your
mortgage for a period of five years or more, then a second
mortgage may be a more reasonable financial solution than
starting over with a new first loan. Consultant with your
financial advisor for an optimal decision. |
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How
do I determine which type of secondary home equity financing
is best for me? |
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A reasonable guide for making this decision
is to evaluate your intended use for the funds. If you
have a pre-determined cost that will require a lump sum
or fixed payment (i.e. major home improvements for which
you have a written estimate) then you may prefer a traditional
second mortgage with rate and term that are fixed for
the life of the loan. Conversely, if you have a flow of
undetermined expenses (i.e. misc. home improvements, misc.
consumer purchases) then you may prefer the check writing
convenience of a home equity line. With a home equity
line of credit, you pay interest only on the funds you
use or need, therefore with unpredicted expenses this
may be the most cost-effective approach. |
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What
documentation will the lender normally require from me
to process my loan? |
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The amount of home equity you have in your property will
in large part determine the answer to this question; the
greater the amount of Home Equity , the lower the documentation
supplies. Also consider the tendency of lenders to provide
lower interest rates for borrowers willing to document
their income. Most lenders will require at least a current
paystub and W-2's (1040's will be requested of the self-employed)
yet others may request no documentation at all. But, if
a lender is offering a knockout rate and terms, then a
complete loan package may be warranted.
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