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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.

jessica,
thanks for your reponse. my purchase of a new home would be for several different reasons- investment purposes, to be closer to a different job, as well as a lower mortgage payment. my thoughts on achieving the lower mortgage payment are this: buy a home for say $150, base the home equity loan amount on the number necessary to successfully get my mortgage payment on the new place down to less than my current payment. i'm hoping to bring in enough on rent to cover my current mortgage and part of the 2nd mortgage. i guess i'm just trying to figure if that is achievable based on rough figures (estimates) right now.
another question is- should i take a larger home equity loan so that i have some reserves in the bank to cover a missed tennants mortgage payment? lastly-does it make sense to take enough to cover the expense of a new car as well? thanks for any advice you can give. i know there's a lot of hypothetical info here. i'm just trying to think things through and figure if it's even possible to pull this off based on the high amount of equity that i have. i hope that by not selling my current place that in a couple of years the market will have rebounded and i'll be glad i kept it and rented it vs. selling.

-thanks so much,

rob
Posted on: 26th Feb, 2008 06:38 am
hi rob,

welcome back.

i don't know how a second mortgage can give you lower payment because usually these loans being subordinate to that of the first, make you pay more in interest. and, if you are taking a larger home equity loan, what loan amount are you expecting? because if you take too large an amount, you may later have problems paying it and may even lose the home.

what i'll suggest is, if you are that keen on buying a second home, go for a loan on the new home itself.

please let me know if there's anything more you'd like to discuss.

hope this helps...

god bless you.

samantha
Posted on: 28th Feb, 2008 02:01 am
ok -- you can refinance your current home from $80k to $190k, taking $100k cashout to give you down-payment funds for your $150k new home purchase and some extra for mortgage payment cushion and car purchase....you need to decide if your want to pay for a car inside your mortgage, since when you replace it...you'll still be paying for it inside that mortgage -- this is really a judgement call, since you may be selling the rental home for a good profit in the future.

your new $190k loan (<80%ltv) will price out at about $1300/month. your new $100k purchase loan will price out at about $750/month. to qualify with full doc income/employment, you'll need to afford $2050 plus your normal expenses less 75% rental income each month (assuming you own no other properties)....otherwise, take less cash-out.

if you are intent on buying another property, you should make application to determine your options -- a good loan officer and realtor will guide you to a good deal with the right financing. good luck!!
Posted on: 28th Feb, 2008 09:59 am
I have been divorced for a year or more and am worried about my ex not meeting payments on the house. Even though she got to keep the house and assume payments when we were divorced my name is still on the mortgage as co-borrower. She doesn't currently have a full time job, but makes payments from alimony and child support. Is there any way I can get my name off the mortgage?
Posted on: 14th Apr, 2008 11:07 am
Hi albe,

Welcome to the forum.

To remove you from the mortgage your ex will have to refinance the mortgage on her name. So can she refinance the mortgage? Are you still on the deed?

Please inform these queries so that I can help you better.

To know more about refinance check out http://www.mortgagefit.com/refinance/faqs.html

Best of luck,
Larry
Posted on: 15th Apr, 2008 01:44 am
albe, it appears from your post that your former wife would be unable to refinance at this time, based on her lack of employment. of course, if the alimony and child support payments are sufficient for her to qualify, that is another story.

frankly, it's impossible for us to make any determination of her ability to refinance based on sketchy information. in other words, she may or may not be qualified to refinance.

the topic of novation has been brought up in many of our forums here. this is a process in which the lender (holder of the mortgage), your former wife and you all agree that you would be removed from responsibility for the payments. clearly, this is a topic you and she ought to discuss, and if you can agree on it, then take your case to the lender.

typically, if your divorce decree stipulates that you are to be excused from making payments on the mortgage, the lender would honor that. to remove your name from a document you signed is, of course, impossible. the best methods to relieve yourself of the obligation are for her to refinance or for the two of you to seek and receive approval for novation.
Posted on: 16th Apr, 2008 07:53 am
My husband and I want to take out a second mortgage. If we owe $129,000 and our house is appraised at $170,000, does that mean we can take out up to $40,000? We want to consolidate debt and also a car loan. Is this correct and the best thing to do?
Posted on: 02nd Aug, 2008 08:54 am
Hi StacyB,

Welcome to our forums.

The equity in your home is calculated as = Current appraised value – amount you owe

That is, equity = $170,000 - $129,000 = $41,000

So, you can borrow maximum up to $41000. But no lender will be willing to lend you 100% of the equity. Mostly lenders prefer to keep the combined loan to value ratio equal to or less than 80% of the current appraised value, which comes to $32,800 in your case. But if you have great credit and good income, you may get somewhere around 85% also.

Are you looking for home equity loan? If yes, take a look at the home equity loan page and find out what it's all about?

Good luck
Posted on: 04th Aug, 2008 03:43 am
stacy, check around with credit unions and local community-type banks in your area. you may find that they'd be willing to go up to 100% of the property value; and at decent rates, also.
Posted on: 04th Aug, 2008 08:56 am
how long do you have to be in your house before taking out a second
mortgage
Posted on: 13th Sep, 2008 06:22 pm
netta, you will find that second mortgages are almost extinct with major lending companies.

you'll also find many community-based institutions will still go out on a limb and make a second mortgage, and many of these will have no restriction on length of time of ownership.

your best bet is to stay local and to shop around with credit unions or small, community banks.
Posted on: 15th Sep, 2008 07:26 am
Netta,

There is no time period although some lenders do require 12 months in the home to use the appraised value over the purchase price.
Posted on: 16th Sep, 2008 11:15 pm
I agree with the negatives on secondary loans/etc.

Except that, if you have known possibility of being able to pay off a chunk of the property ... like in my case, 1/3 of my moms estate, you could get the main mortgage like I did at 5%, and get the 2nd/3rd in small chunks.

I had a $75k, $20k, $10k.

I paid off teh $10k rather quickly on my own. The others continued for a bit. The $20k was paid with my share of moms estate.

The remaining part of my share was not going to be used for mortgage etc but for other... Refinance in this case was not worth it because the rate & payments would have not been better in this case.

If its not worht having the extra mortgages per a quick payoff, dont do it.
2nd mortgags can be expensive.
Posted on: 28th Jan, 2009 08:48 am
2nd mortgages are now treated more like 'equity line' or equity loans.

Still 2nd mortgage in some ways but as expensive.

MY lline was good till It got close to max..
Once it was paid off, I found it was better to be without lineofcredit.
Posted on: 28th Jan, 2009 08:52 am
How do I get a remodeling loan for my home that i only been in for less than a year want to add a 2 car garage.
Posted on: 16th Feb, 2009 05:54 pm
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