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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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