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10 Big second mortgage mistakes to stay away from

Posted on: 05th Oct, 2005 04:38 am
Getting and managing a second mortgage may not sound tough if you've already taken out a loan against your home. However, there are loopholes that you should avoid. So, prior to getting a second loan, take a look at the 10 big mistakes that can make things worse for you.

1. Not being aware of Home equity loans and HELOCs

Home equity loans and HELOCs are both second mortgages taken out against your home equity. Home Equity loans can be either fixed or adjustable, while HELOCs are only available as adjustable rate loans. In addition, Home equity loans are one-time loans, while HELOCs are revolving lines of credit.

Moreover, the purposes of these loans are different. For example, a home equity loan is designed to help you consolidate debts or make home improvements, but when it comes to fulfilling your periodic needs, HELOC is better. All you need is a basic understanding of both the loans to make them work for you.

2. Taking out a large credit line

Think twice before you take out a large credit line. How much your line of credit is for will be taken into account when you apply for other loan and can possibly get rejected too.

Most often your credit line payments are determined on the basis of your total credit liability even though you have not taken out any money from your line of credit. A large credit line implies large payments that may affect your ability to repay the second mortgage as well as other loans.

3. Not shopping enough for the best loan

You may decide to take out the loan from the bank where you have a checking account. But if you wish to get the best loan for your needs, look one that can give you some benefits and help you save due to lower interest rates.

Therefore you should shop around and get quotes from other lenders/brokers to see what else you can get before comparing and choosing the best one.

4. Not asking for a Good Faith Estimate

It's your lender's responsibility to provide you with a Good Faith estimate (GFE) after you apply. A GFE provides you with a breakdown of all the fees involved so you can be assured that you will not be paying any hidden fees or costs. So, even if your lender forgets, just remind them that you are yet to receive a GFE.

5. Thinking a second mortgage costs you less

You may have to pay less on a second mortgage than if you are managing a credit card. To find out which is better, you need to consider the interest rates on credit cards and compare it with the rate on a second mortgage after taking into account the tax deduction. For example, if you have taken a HELOC. Its effective rate is:

Effective rate = rate* (1 - tax bracket)

If your tax bracket is 30% and the actual rate on the credit line is 15%, then,
Effective rate is = 15% * (1 - 0.3) = 15% * 0.7 = 10.5%

Now, if your credit card interest rate is higher than 10.5%, then the second mortgage will be cheaper to manage.

6. Going for second mortgage when you plan to refinance

Lenders may not allow a first mortgage refinance when you already have a second loan on the same property. They may look at the combined loan amount even if you refinance only the first loan.

Lenders may either ask you to pay off both the loans completely or pay down the second loan when you refinance. However, they may allow you to keep the second loan if you can get a subordination agreement from the second mortgage lender.

This agreement ensures that the second loan has a lower priority with respect to the new refinance loan. Thus, you need to consult the lender offering the refinance loan as to whether they will allow you to keep the second mortgage. You can also compare the rates on the refinance and the second loan to find out if it makes sense to keep the second mortgage and refinance the first or refinance both into a single loan.

7. Being unaware of second mortgage tax deduction

Your home equity loan/HELOC may not be fully tax-deductible and you can't always trust the lender to give you the correct information. If you want to take advantage of any tax deductions, you should consult a tax advisor or a CPA.

8. Use Heloc to pay off credit card debts

If you have taken out a HELOC to pay off credit card debts, make sure that you don't completely exhaust the available credit limit. You may find it hard to make the payments on time.

9. Being unaware of a prepayment penalty

There may be a prepayment penalty clause in the second mortgage agreement that could cost you a lot of money if you try to sell or refinance your home and pay off your mortgage early.

10. Not knowing about life caps

Usually home equity lines of credit have life caps where the interest rate can go up much higher than you expected. So, plan your budget and keep a cash reserve if you need it.

No matter why you need money, getting a second mortgage can be a good way to get it. But in order to avoid a second mortgage trap, you should know what you're getting into before you take out a home equity loan or a HELOC.

Hi! i bought a house for $1,20,000 and its appraised value is $1,70,000. So can i take a home equity loan on the equity, that is, $60,000 to pay down the home mortgage?will the lender allow me to take this kind of loan if I say that I shall repay the first mortgage with the equity loan?
Posted on: 25th Oct, 2005 12:12 am
Hi Marilyn,

Generally a lender makes a mortgage loan on the basis of the sale price or the appraised value, whichever is less. You can get an equity out of your property either by selling it or financing it. But the interest rate on a second mortgage or a home equity loan often being higher than a first mortgage, it does not make sense paying the first loan with the second.

Before you proceed towards getting a loan, consult the loan officer and check your borrowing ability. Also talk to a real estate broker regarding the bidding and deposit requirements for a local foreclosure sale.

Posted on: 25th Oct, 2005 03:41 am
We feel like we have been dupped by a fast talking mortgage rep.
Ten months ago we applied for a home equity loan, and were sold a home equity line of credit at an intro interest rate of 5.25% it is now up to 10.25%.
The rep. told us it would not go above 9%. Well after pulling out all the paper work and reading the fine print the cap is 18%!
Can a home equity loan be refinanced to a fixed rate?
Our home value is appx. $195,000. Our first mortage is $107,000 at 5.7%
our equity balance is $58,500. Which was used for debt. consolidation and home improvement costs.
We are at a quandry on what to do, consolidate into one mortage or refinance the home equity loan? We have owned this home 3 yrs.
Posted on: 11th May, 2006 12:13 pm
Hi Laura,

These things happen sometimes and so it's always better to have all the offers in paper than believing the words of a representative of the company. Anyways people do learn from mistakes.

I think it's better to consolidate your mortgage under one head and try to pay it off rather than going for a new mortgage.

Posted on: 11th May, 2006 12:30 pm
Some more information is required about your income, credit, loan amounts.

An HELOC can be converted to a fixed rate. You should ask your lender about that.
Posted on: 11th May, 2006 01:10 pm
Did you question your company about the commitment of the representative? :shock: I think it's better to refinance with a different company. A good mortgage broker can come to your help.
Posted on: 11th May, 2006 01:14 pm
Hi Laura,

Welcome to MortgageFit Forums.

I feel bad about the way the representative had misguided you. Now credit lines allow a lower rate in the initial stage but your payments go up as the Federal Reserve raises short-term rates.

This makes credit lines less attractive deals today with frequent rise in rates. Since it is becoming tough for you to meet the hike, it's wise to refinance it into a fixed rate home equity loan.

Consolidating the loans is also another option. You can refer a reputable mortgage broker in your area with all your docs.

God bless you.

For MortgageFit,
Posted on: 11th May, 2006 01:31 pm
How is your credit? Both of them can be put under 30 year fixed.
Posted on: 11th May, 2006 05:13 pm
lender was talking about some optional credit insurance with the home equity loan, what is it?
Posted on: 12th May, 2007 07:50 pm
Hi Wolfe,

Welcome to Mortgagefit forum.

Some loan packages include optional credit insurance could be like disability credit life or unemployment insurance. Based on type of policy this credit insurance can cover part or most of your payments in case you are not able to make them.

Let me tell you that you are not required to buy any such optional credit insurance and that is why these are called as optional. Only buy insurance which you need.

Posted on: 12th May, 2007 08:00 pm
Wolfe, credit insurance can be bad deal if premium on such insurance is collected up-front at the time of closing & is financed as part of the loan.

However, if you do require optional credit insurance then inquire about possibility of being allowed to pay for it on a monthly basis after the approval & closing of the loan. It will be helpful as with monthly insurance premiums you will not have to pay interest. And afterwards if you think that you do not require the insurance or if the premiums are too high then you can select to cancel the insurance.

Posted on: 12th May, 2007 08:11 pm
would it be considered as a mistake if I take out a second mortgage instead of refinancing my first, how to decide if I am right in taking a second one & not refinancing my first?
Posted on: 28th May, 2007 06:20 pm
Hi Dunham,

Welcome to Mortgagefit discussion board.

You need to first compare rate on your present mortgage with current interest rate for same type of mortgage. Plus also check for how many years you have this first mortgage now.

Let us assume that you have been making payments on your current mortgage for only a few years now & present interest rates are quite close to what you have on your existing mortgage. In such situation you can consider refinancing your present mortgage.

But if rate on your present mortgage is substantially lower than current market rates & you are making payments towards your present mortgage for quite a few years now (say more than 6-7 years) then taking out a second mortgage will be more advisable then refinancing your present loan.

Do let me know if you have any other questions.

Posted on: 28th May, 2007 06:30 pm
I'm considering a second mortgage in order to buy another home. I would then rent my current place to a tenant and move into the new (less expensive) home in order to have a lower monthly mortgage payment. I owe $80K and my condo is worth about $240K. My current int rate is 5.75% on the first loan. If I took a second mortgage on my current home, can you estimate the monthly payment for me? I hope this makes sense...I'm exhausted. Thanks for your help!
Posted on: 25th Feb, 2008 10:50 pm
Hi Rob,

Welcome to our community forums.

In order to determine the monthly payments on your second mortgage, I need to know what loan amount you are getting from the lender, the rate of interest and whether it's a home equity loan or Heloc etc. First of all, are you buying a house just for the sake of it or is it all about getting a less expensive home?

Please don't take up a second mortgage just because you want to lower payments. Payments can be lowered even if you can refinance and that's a better option. But I don't know how much lower a rate you can get considering the fact that you already have an interest rate of 5.75%.

I think it's better if you talk to a few lenders and find out what rate they can offer you on the refinance loan. A second mortgage is again another loan on the home and it is risky because you will be managing 2 loans and if in case you can't pay, you're in trouble with 2 loans. Still, if you think your current financial situation is good enough to help you afford the 2 loans, then you may very well go for it.

However, choose a good tenant who can look after the property well without damaging it. And, make the payments on your own from the rental payments; don't leave it for the realtor to collect the rent and pay the mortgage. You may land up in trouble later. I find so many people sharing their experiences on how they've suffered at the hands of tenant and realtors.


Posted on: 26th Feb, 2008 02:36 am
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